Stretched valuations could weigh on Indian stock market returns in 2024, cautions CLSA

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Also Read: MSCI EM Index: India surges to second place; weightage likely to cross 20% by mid-2024 CLSA believes that Nifty is trading at earnings multiples that have historically led to reversals. “India is now the most expensive of the world’s largest markets and the only one trading in the top decile of its historical trading range. In fact, 15 out of the top 19 global markets are trading below their historical average valuations.

This shows how stretched Indian valuations are in relative terms; it also emphasises the likelihood that any narrative or earnings growth disappointments could trigger a correction," CLSA report said. Any improvement in the investment narrative of other large but cheaply priced Emerging Markets could force rotation of flows away from India. Moreover, the Nifty earnings yield discount to the Indian 10-year government security yield, at 2.2 ppts, also puts equity valuations relative to bonds at levels only seen on 3% of days since 2005, and is a position from which one- and two-year returns have historically been negligible.

Also Read: Expert view: Here are key risks market will have to address in 2024 The rally in the stock market of the past few months reflects rising confidence in a US soft landing. In this scenario, falling yields and a weaker US dollar should support more flows into emerging markets (EMs). Equity valuations at a premium to bonds in the US as well as India may drive a migration away from equities into bonds.