Neelkanth Mishra, the key equity market strategist for Credit Suisse in India, says that valuations of domestic markets in terms of price to earnings (PE) multiple are high viz-a-viz the global markets. In the near term, further PE appreciation for the Indian markets was unlikely, Mishra believes.

PE simply means the premium investors are ready to pay over and above a company’s earnings. Similarly, it is also used to value a country’s market. Nifty’s PE is currently 24 and historically it is seen that market valuations turn expensive when the PE moves above 30 or 32.

“India’s PE premium to global equities is already high, further PE expansion may be unlikely as India’s market moves are likely to follow the direction of change in financial year (FY) 2024 earnings,” said Mishra, Co-Head of Equity Strategy, Asia Pacific and India Equity Strategist at Credit Suisse.

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He is of the view that in contrast to the steep downgrades that markets were used to in the pre-pandemic period, earnings forecasts for FY22 and FY23 have seen upgrades and the same should occur for FY24 too. According to Mishra, the main risks to this outcome remain global, as a slowing global economy could imperil prospects of several globally-linked sectors.

GDP likely to see an upgrade

Credit Suisse continues to expect a 4 per cent upgrade to the current consensus GDP for FY23, as output should get closer to the pre-pandemic trend than what is currently forecast. “The recovery has so far been lop-sided, but in the next three to six months most of low-income jobs should recover too,” Credit Suisse said.

The research house further expects the positive economic growth momentum of the last few months to continue well into 2022, though the pace could moderate if energy import prices (crude oil, gas, coal, fertiliser, and palm oil) remain high.

Credit Suisse says that employment in some sectors is not yet back to pre-pandemic levels, like education, travel, construction materials and auto manufacturing, but these should improve as the economy continues to open up, helped by high seroprevalence.

Consumer spending is recovering, strong equity fund-raising has repaired risk capital lost during the pandemic, growing IT demand globally is a stimulus, and dwelling construction, which had shaved 1.1 per cent per year from growth in FY12-20, is seeing a nascent but broad-based recovery.

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According to Credit Suisse, India’s macroeconomic backdrop is supportive too, with fiscal conditions improving after an 18 per cent rise in government debt to GDP during the pandemic: 1H FY22 receipts were 16 per cent of the full year estimates higher than normal and government cash balances with the Reserved Bank of India (RBI) are 1.5-2 per cent of GDP higher than normal. This supports the revival of the State government capital expenditure.

While high energy prices are eroding the substantial balance-of-payments (BoP) surplus, the rupee is holding up much better than most other Emerging Market (EM) currencies.

However, given the rise in India’s price-to-earnings (P/E) multiple, Credit Suisse’s Global equities strategy team has moved India to ‘small overweight’ for 2022, from its earlier recommendation of ‘strong overweight’ in February 2021, the research house said.

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