“We see a clear empirical trend of falling equity returns for investments made at every rise in the equity and bond yield gap,” said Vikash Kumar Jain, investment analyst, CLSA, in a note to clients. “For each market, investments made above a particular level of this valuation gap ends up yielding negative or very low equity returns; ie bonds become more attractive investments than equities above this level.”
The Sensex and the Nifty have gained 15.5% from June 17 – when both the indices hit their 52-week lows. Till August 17, both indices had run up almost 18% before US Federal Reserve Chair Jerome Powell dashed market expectations of less aggressive interest rate increases or even of policy easing in the near future in a hawkish speech at the Jackson Hole symposium on August 26.
CLSA said the Nifty after the recent rally is currently at an estimated price to earnings (PE) ratio of 19.4 times.
“Empirical evidence of the past 18 years suggests that investing over 19 times PE has also led to negative 1-2 year returns on Nifty,” said Jain.