Valuations in 'high optimism zone' as Nifty forward P/E tops 20x: ICICI Sec

With the one-year forward price-to-earnings (P/E) multiple for the benchmark Nifty going past 20, valuations are in a ‘high optimism zone’, says ICICI Securities. Historically, one-year returns for the markets have been tepid whenever valuations have been in this zone, reveals a study by the brokerage.

“The Nifty is entering the ‘high optimism zone’ as the one-year forward P/E multiple touches 20 times implying that equities currently have an ‘earnings yield’ of 5 per cent versus about 7.2 per cent for government bonds. Going by historical performance over the past two decades, the one-year forward average and median returns for the Nifty stand at three per cent and one per cent, respectively, whenever it has traded in the 20-22x P/E multiple range. This is against the 12 per cent expected annual return that Indian equities have delivered over the long term (10-year rolling returns) since 1990,” say ICICI Securities strategists Vinod Karki and Niraj Karnani in a note.

However, over the past two decades, the Nifty has still managed to deliver positive one-year returns on 66 per cent of the occasions that the valuation has been 20-22x.