ET Intelligence Group: Dalal Street is now busy drawing parallels between the Nifty’s 2007-08 peak and its recent climbs past the 10,000 barrier. The all-time record highs have meant 23% YTD gains — and 74% in the past four years. The sharp rally in the broadest gauge for Indian equities has, understandably, put the microscope on valuations and the likelihood of a correction. Absolute levels notwithstanding, a raft of valuation parameters and factors seem to indicate that equities are far from peaking.
CONVENTIONAL VALUATION MULTIPLES
It is true that at 23.3, the Nifty’s P/E multiple might be close to that in January 2008, when the previous bearmarketsetin.Butonmostother valuation parameters, equities appear way cheaper.
For instance, on the price-to-book multiples, the Nifty is at 3.6 times currently, against the peak of 6.6 times in early 2008. India Inc’s market capitalisation-to-GDP is at 90% currently in comparison to 150% during the January 2008 peak. With earnings growth set to revive soon, the price-to-book and m-cap-to-GDP are better valuation yardsticks than simply the P/E.
The earnings-to-GDP ratio is the lowest in the last 10 years — at 3% now, compared with 7.1% in FY08. This shows that corporate earnings are at cyclically low levels and analysts expect them to rise from the second half of the year. Data since 2000 show a degree of correlation between rates and equity indices — albeit with some lag effect. Directional changes in the rate cycle clearly mark the beginning of either economic contrac-