At a time when Indian equity benchmarks have been losing heavy ground amidst a weakness in rupee and selling pressure from foreign investors, global financial major CLSA has said that data points from the bond and equity market hint that the Nifty could fall by as much as 30 per cent.
“The difference between 10-year Indian and US GSec yields has fallen to a 13-year low of 3.3 ppt (percentage point). This, along with a near-record Indian equity valuation premium to peer markets as well as to domestic bonds, indicates a kind of decoupling for Indian bonds as well as equity markets,” stated the CLSA report released today.
“We do not expect this to be sustainable and regard it as indicative of a very low margin of safety. A simple valuation mean(s) reversion anchored on bond yields indicates fears of 30% downside in the Nifty,” it added.
Also Read: Nifty Bank plunges 10% in 9 sessions; should you buy the dip?
The report further highlighted the fact that Indian 10-year bond valuation when compared to US bonds is at its highest in 13 years.
“The 10-year GSec yield in the US has spiked by 150 bps (basis points) in less than two months to about 4% – an almost 14-year high. In comparison, the Indian 10yr GSec yield has risen only 25bps from its recent lows to 7.3%,” it said while highlighting the fact that India is the only market other than the US where equity valuations are extended versus domestic bonds.
“At about 2 ppt, the difference between India’s 10yr GSec yield and the Nifty’s earnings yield is at a point at which negative equity returns usually ensue… The Nifty’s absolute PE is slightly below +1SD (standard deviation) of its historical average and at levels where positive equity returns are usually not forthcoming,” it added.
According to CLSA, the 10-year bond yield minus the Nifty’s 12-months forward earnings yield is hovering near the crucial level.
Also Read: These 32 BSE 500 stocks are down over 50% from their 52-week highs; analysts turn bullish
Incidentally, the Indian benchmark indices, which are trading marginally higher today (Thursday), lost ground on the previous six successive trading sessions with the 30-share Sensex shedding over 3,100 points.
Foreign portfolio investors or FPIs have also pressed the sell button with their net outflows for the current month pegged at nearly ₹ 1,700 crore – after pumping in ₹ 51,204 crore in the previous month, as per data from NSDL.
Meanwhile, the rupee touched a new low on Wednesday after the US dollar climbed to new highs following the White House’s statement that the US is not looking at any accord to weaken the dollar. The domestic currency had slumped 40 paise to an all-time low of 81.93 against the US dollar in early trade on Wednesday.