Market Valuations at Peak Levels Indicate Overheated Conditions, Say Analysts

Optimism around India's growth prospects, sound fundamentals, robust earnings and policy continuity led to FIIs returning to India, which with greater domestic participation helped fuel the 20 per cen rally for the Nifty 50 in CY23, brokerage firm Elara Securities said in a report.

This has pushed market valuations to peak levels and extreme optimism, with 45 per cent of the stocks within BSE200 universe trading in 75-100 per cent Long Term Growth Value (LTGV) bucket, the report said.

Markets are pricing in long-term growth at historically high level, with LTGV for BSE200 at an unprecedented 63 per cent, 1162bps above its long-term average, indicating overheated conditions, the report said.

This rise in LTGV has mainly come at the expense of the Current Business Value (CBV), while short-term growth value (STGV) has held up. We expect the market to remain range-bound in the near-term, with intermittent bouts of volatility amid profit-taking, it added.

However, the Nifty appears more favorably positioned, with its LTGV at 61 per cent, lower than both BSE200 and Nifty Midcap 100, suggesting lesser speculation priced in. Value distribution in the LTGV also favors Nifty, with 26 per cent of the companies in value zone (less than 50 LTGV bucket) versus 22 per cent in BSE200, the report said.

Energy's LTGV has expanded into positive territory after being negative for the past four years. Tailwinds such as: (a) favorable government policies, (b) beneficial global market dynamics and (c) shift towards sustainable energy suggest strong outlook.

Conversely, we see Banks to continue facing challenges in the near term, including profitability pressures and declining margins. The sector's current valuations include significant long-term expectations, which given the sectoral headwinds and low margin of safety might lead to a cautious outlook, the report said.

The PSU sector's rally has pushed valuations to near-peak levels, with optimism reflected in expansion of LTGV. Historical trends suggest potential pre-election gains, but peak valuations warrant caution. Strategic disinvestments could unlock further value, offering a cautiously optimistic outlook with selective opportunities post-elections, the report added.