Falling P/E may cap returns in 2023: Credit Suisse's Neelkanth Mishra

India’s outperformance this year has been underpinned by expanding valuations which cannot go on forever, Credit Suisse has said in its report on outlook 2023.

“Of the three drivers of market returns, which are forward earnings, global market price-to-earnings (P/E), and India’s P/E premium to global equities, earnings and premiums have dominated returns over the past year, offsetting a falling global P/E. A higher premium is possible, but unlikely,” the brokerage has said.

Credit Suisse expects domestic earnings to grow 15 per cent over the next one year and market returns could be in line with that.

“The potential 15 per cent gain in forward earnings may set the ceiling for returns over 2023, and a lower P/E poses a downside risk to that,” said Neelkanth Mishra, co-head of Equity Strategy, Asia-Pacific and India head of research at Credit Suisse.

Currently, the 12-month earnings per share (EPS) for the Nifty50 is around Rs 950. The Nifty last closed at 18,415, which means the index trades at 19.4 times its forward P/E.

If Nifty earnings grow as forecasted at 15 per cent, by December 2023, the 12-month forward earnings will increase to Rs 1,088. However, the market returns could lag as Credit Suisse expects contraction in P/E multiples as the global risk-free rate and equity risk premium are expected to remain elevated.

Credit Suisse prefers sectors linked to the domestic economy (financials, cement, and construction) as it expects a stronger acceleration in India’s GDP growth in 2023.