Rising commodity costs and stretched valuations pose a danger to the rally in Indian shares, inflicting shares to underperform native bonds over the subsequent 12 months, based on UBS International Analysis.
“Valuations of shares versus bonds are at not often seen ranges,” stated Sunil Tirumalai, head of India technique in Mumbai at UBS, referring to the unfold between the yield on 10-year authorities bonds over the yr. ‘India and the NSE Nifty 50 earnings efficiency. “On most of those events in historical past, we see shares underperforming over the subsequent 12 months.”
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Persevering with to recuperate 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 almost 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 occasions its 12-month forecast earnings, up from a five-year common a number of of 17.7 occasions, as buyers rack up shares on expectations that vaccine rollout will result in a put up financial rebound. -pandemic and can improve enterprise earnings.
“Whereas the momentum for financial restoration is sweet, we consider inventory markets in India are beginning to look strained on valuations,” Tirumalai stated. Nifty’s above-average premium on rising market equities seems weak, as many rising commodity-exporting nations may see upgrades, ”he stated.
UBS expects these pressures on commodity prices to start out displaying in Indian company earnings within the January-March quarter and past, and pose a danger 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, based on Tirumalai.