Nifty50 valuations: cheap or not, ideal valuations to build a long-term portfolio

Indian benchmarks corrected 14-15% from all-time highs and as a result, Nifty50’s P/E fell below 20x levels, reasonably below its 10-year average P/E of about 22.45x. While this average may not be directly comparable as NSE changed its methodology for calculating the Nifty P/E last year, the current P/E is certainly no longer in the expensive zone.

When we calculate the decline in Nifty’s P/E during periods of major corrections over the past 12 years, the average decline has been 27.7%. Currently, the decline from the October high is over 29%. So even taking this data point into account, it looks like valuations have softened and are now starting to look attractive.

That said, India’s valuations relative to other emerging markets are still at a considerable premium. In fact, if we look at the valuations of the major emerging markets as well as the developed markets, with the exception of the United States, they are almost approaching pandemic lows. However, India has been quite resilient and our current P/E is also quite high compared to pandemic lows.

There is no doubt that the premium placed on India is due to the structural story which, despite all the macroeconomic headwinds, still looks solid.

India’s income trajectory has yet to be fully derailed and the fact that India will be the fastest growing economy in 2022 speaks volumes about India’s fundamental story. Given the global macros, a strong positive catalyst may be needed to pause this corrective phase. Although current valuations provide a good starting point to start building a strong long-term portfolio.

A bottom-up approach and an overweight position towards large caps should be the strategy of choice.

Event of the week
In an effort to control rising inflation, the government last weekend announced an increase in export and import duties on commodities, including steel and iron ore, resulting in an 8.14% drop in Nifty Metal in a single day.

This will act as a double whammy for the steel majors as on the one hand rising export duties render their products incompetent in world markets while on the other hand they will even have to cut domestic prices to eliminate oversupply.

Consequently, the turnover, as well as the bottom line of these companies, will be shaken. It is highly likely that the government will come up with more such measures to curb inflation. Even sugar stocks saw a similar drop when a restriction on sugar exports was announced this week. Given the uncertainties and the fact that these sectors are highly cyclical in nature, it is best to avoid them for the time being.

Technical outlook


The Nifty50 index closed slightly positive this week. The index continues to range and looks oversold in the short term. Major developed and emerging market indices are also showing immediate short-term formations.

Additionally, a bullish reversal is quite evident in the Banking Index which outperformed the benchmark after bouncing off the rising channel support.

Given these indications, Nifty’s decline looks limited down to 15,700. A decisive break above 16,400 may trigger a retest of the 16,800-16,900 levels. Traders are therefore advised to maintain a bias bullish with a strict stop loss below 15,700 levels.

Expectations of the week
The movement of the global market will be influenced by the manufacturing PMI figures for China and the US consumer confidence index. At home, amid global recession fears, Indian GDP growth data for the fourth quarter of FY22 is eagerly awaited.

Given the commodity price spikes, lower wheat yields and continued pressure on contact-intensive services, GDP growth is widely expected to be lower than its previous quarter. However, if growth is less than projections, existing emotions may worsen.

Apart from the GDP printout, automakers will also be the center of attention when they release their monthly sales figures. Given these host data releases, the week ahead is sure to be action-packed and investors are advised to remain cautious with their trading choices.

Nifty 50 closed the week at 16,352.45, up 0.53%.


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