Rising commodity costs and stretched valuations pose a threat to the rally in Indian shares, inflicting shares to underperform native bonds over the subsequent 12 months, in keeping with UBS International Analysis.
“Valuations of shares versus bonds are at not often seen ranges,” stated Sunil Tirumalai, head of Indian technique in Mumbai at UBS, of the unfold between the yield on 10-year Indian authorities bonds and the earnings yield of the NSE Nifty 50 Index. “On most of those events in historical past, we discover that shares have underperformed over the subsequent 12 months.
Persevering with to get well from the lows because of the pandemic in March 2020, Indian shares have largely outperformed their Asian friends to date this yr, helped by sustained overseas shopping for of native shares. The Nifty 50 gauge jumped practically 9% in 2021, greater than triple the advance of the bigger MSCI Rising Markets Index, and is approaching a document excessive reached final month.
The Indian gauge is buying and selling at 21.8 instances its 12-month forecast earnings, up from a five-year common a number of of 17.7 instances, as traders rack up shares on expectations that vaccine rollout will result in a publish financial rebound. -pandemic and can improve enterprise earnings.
“Whereas the momentum for financial restoration is nice, we consider inventory markets in India are beginning to seem strained on valuations,” Tirumalai stated. Nifty’s above-average premium on rising market equities seems susceptible, as many rising commodity-exporting nations may see enhancements, ”he stated.
UBS expects these pressures on commodity prices to begin displaying in Indian company earnings within the January-March quarter and past, and pose a threat of downward revisions to consensus estimates for India. Fiscal yr 22. One other supply of concern is that overseas institutional possession of Indian shares is reaching historic highs, in keeping with Tirumalai.