Market pricier than previous crisis levels despite grim growth outlook

The markets have recouped more than half of their losses triggered by the Covid-19 pandemic. The recovery in the market has been on the back of a slowing rate of new cases in key areas, aggressive fiscal stimulus measures and hopes of early cure to the disease.

However, the virtual shutdown of the economy and the question mark surrounding the return to normalcy mean the markets are not yet out of the woods. Also, many are terming the downturn in the economy to be worst in a century.

Despite the grim growth outlook, market valuations currently are way above previous crisis levels. According to an analysis by Goldman Sachs, India’s price-to-earnings (P/E) on a one-year and 24-month forward basis is more than double that of trough valuations during 2002-03 and even 2008-09.

“MSCI India ‘real’ 12-month forward P/E stands at 19 times, well above market troughs of around 8-10 times during the GFC (Global Financial Crisis), AFC (Asian Financial Crisis), and 2002 crisis. In terms of relative premium versus the MSCI Asia Pacific (excluding Japan), the ‘perfect forecast’ premium stands at similar levels of 18 per cent. As the market focus has likely shifted to recovery in EPS in 2021, we calculate forward multiples based on 24-month EPS. MSCI India 24-month forward PE stands at 16 times, well above 6-7 times previous market troughs (assuming perfect foresight) suggesting valuations look extended even after accounting for the EPS recovery next year,” the brokerage says.