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BEER ratio
On Thursday, the 10-year bond yield stood at 7.13 per cent, while the one-year forward Nifty50 PE stood at 19.60, resulting in an earning yield value of 5.10 (1/forward PE or EPS/price).
That gives a BEER ratio of 1.398. BEER ratio is a metric used to evaluate the relationship between bond yields and earnings yields. A rise above 1 suggests that the stock market has become undervalued.
"The long-term bond yields have gone up by 40 basis points in the last five months in anticipation of rate hikes by the RBI. After the recent correction, some cool-off was seen in the BEER ratio. However, it is now trading above its LTA, indicating a slightly expensive equity market at current levels as against the bond market," said Axis Securities in a note..
M-cap-to GDP
The market capitalisation-to-GDP ratio, also called the Buffett indicator, has come off from a high of 112 per cent but is still trading above 107 per cent, suggesting that Indian equities are expensive. As per the indicator, stocks are deemed expensive when the value climbs above the 100 level. For India, the average 10-year m-cap-to-GDP ratio stood at 79 per cent, as much of the economy is unlisted and non-formalised.
"The ratio has been volatile, reaching 56 per cent of FY20 GDP in March 2020 from 80 per cent in FY19 and then sharply bouncing back to 112 per cent in FY22. The ratio is now at 107 per cent of estimated FY23 GDP," Motilal Oswal said in a note.
Axis Securities noted that a similar upward earnings momentum, as is being seen today, was witnessed in FY10 earnings immediately after the GFC crisis, leading to the m-cap-to-GDP ratio of 95-98 per cent. With a positive earnings momentum in the current cycle, it sees the ratio improving in the coming times.
PE, PB multiples
Nifty50 trades at a 12-month forward PE of 19.6 times, in line with its LPA. But forward P/B at three times is still quoting at a 15 per cent premium to its historical average.
On a trailing basis, the 12-month trailing P/E for the Nifty at 22.8 times is at a 7 per cent premium to its LPA of 21.3 times. At 3.4 times, Nifty’s 12-month trailing P/B also trades above its historical average of 2.9 times at a 17 per cent premium.
Others
The MSCI India index is trading at a 124 per cent premium to the MSCI EM index, above its historical average of 62 per cent. Over the last 12 months, the MSCI India index (up 4 per cent) has outperformed the MSCI EM index (down 24 per cent) hands down.
In terms of market capitalisation, while the global m-cap declined 15.9 per cent or $19 trillion in the last 12 months, India’s m-cap rose 3.1 per cent during the same period.
Meanwhile, Nifty50 is also trading at a 12-month forward return on equity (RoE) of 15.6 per cent, above its long-term average.
What analysts said
Motilal Oswal said the market bounced back smartly over the last two months, wiping out its entire decline year-to-date.
"Nifty50 is now trading 2 per cent higher YTD and is strongly outperforming global markets. With this rally, the the index now trades at 21 times FY23E EPS, comfortably above its LPA, and offers limited near-term upside in our view. The upside, from here on, will be a function of stability in global and local macros and continued earnings delivery against our expectations," it said.
BofA Securities has a base Nifty50 target of 18,500 for the ongoing calendar. The brokerage sees the NSE barometer trading in the 17,000-19,500 range as key risks play out.
ICICI Securities maintained its March 2023 Nifty target at 19,000, given the positive outlook for profit, credit and investment cycles. It does not anticipate the earnings yield to breach the floor of around 5 per cent on the downside.
Axis Securities has a March 2023 target of 18,400, as it values the index at 20 times on FY24 earnings.
"We believe, though aggressive policy tightening will help in curbing inflationary pressure, persistently elevated oil and commodity prices would continue to pose challenges to the market multiple in the next few quarters. The current level of India's VIX is below the long-term average, indicating that the market is
in a neutral zone (not in a panic or exuberance zone). The current setup is a ‘Buy on Dips’ market," Axis Securities said.
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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