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Entering the J-curve: 2022 Eye on Markets (Overvalued? We think not)

Updated: Jan 13, 2023



Unless you’ve been living under a rock, you’ve witnessed and even benefitted from the big 2020-21 rally in Indian Equity markets. Logically one would expect stocks to be much more expensive today than April 2020, when the dip and subsequent rally began. What if we were to tell you thats not really true? In fact, the Nifty PE is now in its early 20s, which is similar to April 2020 and the 10 Yr long term PE average. NIFTY PE is the price paid to earn 1 Rupee. Simply put, what the market is willing to pay today for a stock based on earning is exactly what it was willing to pay just pre-pandemic. The million-dollar question then is: Are markets expensive? Do we therefore need to be cautious? The Cambridge Wealth Investment Committee supported by our Research Desk answers.

Data under the hood:

  • Nifty 50’s 10 Yr average PE is 25 indicating current levels while not a bargain, are not in bubble territory

  • Feb 2020: Nifty PE average PE was ~25 as well. This tells us that markets post-Covid 19 are not terribly over valued as the recent performance may predict. Why is this?





Nifty PE : 2020 vs 2021.



Notice how the nifty PE in 2021(red line) has slid below the 2020 levels?

  • This basically indicates high earnings growth in FY21 as an outcome of the Infrastructure boom ,Liquidity Inflows, and Tech-Driven supply chain efficiency due to which companies are seeing low debt levels and high growth in PAT which is a good thing since companies can now infuse more money and focus on growth and expansion.

  • From a fundamental point of view, the market was supported for the last four-five quarters by positive earnings and we were early into the cycle where multiples expanded and positive earnings surprises were there .

  • But looking at things now, the easy money is behind us and it’s time to moderate return expectations for the next 12 to 18 months. You may see the markets will get polarised ( a state where the market and investors have made these few stocks/sectors the centre of their attention)


Now you may be wondering, that the capex cycle has just about started and the real benefit of capacity expansion would ideally kick in. Shouldn't we expect better times then?

  • Well you’re right. But its also imperative to note that markets always focus on incremental change. What the market is pricing today is a decent growth for the next 2-5 years. Now it will boil down to the actual delivery.

  • While there are early indications that both government and private sector capex is likely to pick up even more in the coming quarters, the same trend was witnessed during the last decade as well, where we saw that the sector hasn’t done anything and are not very expensive on the valuation side. The same positivity is now there on industrials and manufacturing as a theme.

  • Only this time, you can see that the impact of the China plus one and the PLI themes has started flowing into the Indian economy. Every company is talking about incremental orders coming from global suppliers which were dependent on China.


Thats what’s happening around the world. But here in India, what should we do with our portfolio?

  • Instead of waiting for a downturn, we focus on identifying the wealth compounders of tomorrow and remain invested throughout market cycles. As mentioned earlier, the next cycle belongs to supply side entities which mainly include Industrials, mainly due to the Capex cycle taking off, resulting in expansion across verticals.

  • There is a near-term head wind around money supply tightening, where the RBI's MPC has kept repo rate unchanged for the seventh straight meet (7th Dec,2021). What this means is that as long as there may be excess liquidity in the market, inflation will continue to remain elevated bringing down your overall Portfolio returns.

  • And lastly, it would be wise to not extrapolate last 18 months’ returns into the next 18 months. It’s time to moderate your near-term expectations while keeping quality and long term yeild expectations the same



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