Markets appear capped due to elevated valuation of Indian equities, increasing Fed rate estimate

New Delhi: Indian stock market appears to be capped in near term given elevated valuation and increasing US Federal Reserve rate estimate in CY24 due to hawkish US Fed commentary, sticky US core inflation with buoyant wage growth, Antique Stock Broking said in a report.

On elevated valuation, the report said Indian equities are trading at 20.2x 1-year forward P/E multiple (as against a long-term average of 18.4x) helped by strong FPI equity flows (highest among select EMs for fourth month in a row), resilient mutual fund SIP flow, benign crude oil prices, sharp pick-up in monsoon, resilient domestic macro and 13 per cent corporate operating earnings growth in Q1FY24 likely with minimal earnings downgrade.

Indian equities continue to out-perform and is trading at lifetime high levels, supported by strong FPI equity flows which are highest in calendar year to date (CYTD) among select EMs and highest for four month in a row, the report said.

US Fed minutes show a hawkish stance continues as core inflation remains sticky.

Key tak-aways from US Fed meeting minutes (held on June 13-14) are that almost all participants judged it appropriately to keep rates unchanged at current meeting, but further increase in 2023 would be appropriate.

In addition, core inflation has not shown sustained easing since the beginning of the year and effects of high interest rate on housing sector appears to be bottoming out as home sales, builder sentiment and new construction has improved since the start of the year.

Effects of expected further tightening in bank credit conditions amidst already tight financial condition may lead to mild recession (in fourth quarter and first quarter next year).

Bond yields have been on uptrend as consensus is building higher US fed rate by CY24 end of 4.1 per cent (as against 3.9 per cent last week) given the hawkish commentary of the Fed in its latest minutes highlighting sticky core inflation (US PCE core deflator at 4.4 per cent YoY) and buoyant wage growth.

(Sanjeev Sharma can be reached atSanjeev.s@ians.in)

–IANS