In an overwhelming consensus not to bet against the Fed, the focus is on relative valuation. India performs better than its counterparts in emerging countries on the relative valuation matrix. As a result, Asia’s third largest economy has received record inflows in the past three months.
The valuation matrix for global equities has been overhauled, with bond yields remaining at record levels and inflation remaining low for an extended period. The spread between the bond yield and the earnings yield – the inverse of the price-earnings multiple – is 143 basis points, which is quite close to the historical average level of 112 basis points. Thus, equities are still relatively attractive for bonds.
Equities more attractive than bonds
Typically, spreads greater than 200 basis points trigger the buy. The yield on 10-year bonds fell 68 basis points last year. Jefferies believes India’s valuations are still manageable due to the favorable matrix of bond yields and yields and believes low yields should stay. The pressure on global yields can be measured from the fact that nearly $ 18 trillion in debt is trading below zero and that amount has doubled since 2019.
India’s relative valuation has traded near historical averages thanks to the rally across the emerging market universe in 2020 on the back of the weaker dollar and LIBOR. The momentum could stretch, but the success of the immunization program is essential.
Nifty 50 trades at a 41% premium over the EM Index, compared to its 10-year average of 39%. Net short bets by traders linked to the dollar index reached their highest level in nearly a decade, according to CFTC data. India’s higher price growth ratio (PEG) relative to the emerging markets index may support (or even increase) India’s valuation.
In 2020, the global market capitalization as a whole hit an all-time high as investors launched stocks in search of yield. This resulted in a global market capitalization of $ 100,000 billion for the first time.
However, India’s contribution to global market capitalization still stands at the historic average level of 2.38 percent. This ratio was above 3% in 2008, 2010 and 2018, when India hit an overheating zone.