The spread between Nifty earnings and 10-year GSec yields has widened to its biggest since June 2018, suggesting market momentum may be capped in the short-term, analysts said. said the analyst.
“The gap between 10 years G-Sec Continued and relatively high earnings yields, following the recent market rally, could weigh on stock market performance, said Kunal Vora, head of Indian equities research. in short term ”
. “Historically, at this spread, market returns over the next year have been muted. Assuming that bond yields remain in the same range, earnings yields must rise to close the gap. maybe through a correction over time or a bear market.”
The yield difference between Nifty earnings and government bonds is tracked to see if the risk-reward ratio for investing in stocks is favorable.
Nifty is up 10% over the past month from its 2022 low, while bond yields are down 23 basis points from 7.37% to 7.16% over the period. The estimated earnings yield relative to the yield on bonds that are trading below the 15-year average is 0.76%.
The current stock market yield is around 4.57% – slightly below the 10-year average of 4.8%. Valuation multiples look expensive even on an absolute basis, and so consolidation is more likely in the short-term, analysts said.
“The gap in valuation between the Nifty Emerging Markets index and the MSCI, as well as the gap between the Nifty earnings yield and the 10-year G-Sec yield, are downsides and we can expect Expect market returns to fall further in S Hariharan, head of sales, said.
Foreign portfolio investors have net sold nearly 17,013 crore in Indian debt instruments so far this year, while they have withdrawn ₹2,000 crore out of shares. In July, they turned net buyers to 6,720 ₹ crore for the first time in 10 months.
“Despite the interest rate ‘stress’, we believe we are still in a quantitative tightening cycle, so it is less likely that equity valuations will yield sub-5% returns or trade over 20x on a 1-year forward basis compared to the current valuation of 19.2x,” said Vinod Karki, equity strategist,
. “Increasing geopolitical tensions between the US and China bring more uncertainty to capital markets.”
Yield to earnings is the inverse of the price-to-earnings ratio. If the company has an earnings yield of 5%, that means the stock has a PE ratio of 20 times.