Re-rating of IT, consumer stocks takes valuations to dizzy heights

By Ashutosh R Shyam & Manish Yadav

ET Intelligence Group: India remains a clear outperformer in global equity sweepstakes: It is the only major stock market where PE multiples expanded this year, according to Credit Suisse.

Indian market rose 12 per cent in the first eight months of 2018, and 40 per cent of the gains came from P/E expansion. Brazil, US, Indonesia and Japan, for instance, have witnessed P/E compression of between 5 per cent and 25 per cent this year. The MSCI India index is trading at 18.91 based on the next twelve-months’ earnings and expanded by 66 basis points in 2018, according to Bloomberg data.


Typically, the P/E of index expands in a risk-on environment. But India’s P/E has expanded this year when global risk appetite is the lowest since 2011. The global risk appetite barometer of Credit Suisse has been in ‘panic’ territory for the past two months.

Significant P/E re-rating of IT and consumer staples stocks has led to the P/E expansion of Indian equities. The IT and consumer staples stocks, which accounts for about a quarter of the Nifty, have seen P/E expansions of about 15 per cent and 17 per cent, respectively.

But, the resilience of Indian equities is turning investors jittery, with valuations being the most expensive in a decade and one standard deviation from the mean. On various valuation parameters, such as earnings yield-bond yield gap and relative to emerging market and developed market, the market appears to be expensive.

The Indian market is trading 26 per cent and 62 per cent premiums to developed and emerging markets, respectively, the premiums being seven-year highs.