Nilesh Shah, the Managing Director of Kotak Mahindra Asset Management Company (AMC), on August 2, 2024, said market returns will moderate in the medium term after its exceptional bull run from the Covid-19 bottom. Though he signalled the rise in the PE ratio of stocks since the pandemic, he feels corporate earnings growth justifies it to some extent, and fundamentals will provide the support level.
Today he shared his insights on the current market scenario on social media platform X, "We have seen an exceptional broad-based bull run in the market from Covid bottom. In BSE 500, one in ten stocks have delivered returns exceeding 10 times, while one in every five stocks has yielded returns exceeding 5 times since the Covid-19 pandemic."
BSE 500 Trumps NSE 100 In Returns by Small Margin?
From January 1, 2020, to August 1, 2024, stocks demonstrated significant returns. Out of the broader BSE 500 universe, 43 stocks provided a 1000 per cent return, while only 3 stocks from NSE 100 achieved the same. Quite naturally more mid and small-cap companies have delivered 1000 per cent returns compared to large caps.
When it comes to 500 to 1000 per cent returns, 59 stocks in the BSE 500 universe found a place compared to 23 stocks from the NSE 100 universe. Her winning scale wins in favour of NSE 100 stocks. BSE 500 Index represents around 90 per cent of the free float market capitalization of the stocks listed on the BSE and the NSE 100 around 70 per cent of NSE stocks.
Is Caution Indicated Ahead?
High PE Ratio: Nilesh Shah stated that before the COVID-19 pandemic, only 93 stocks in the BSE 500 had a P/E ratio above 50. Now a whopping 228 stocks have a PE ratio above 50. As many as 21 stocks had trailing PE higher than 100 before the Covid-19 pandemic. Now this number has increased to 68, a 3-fold increase.
This increase suggests that investors knowingly or unknowingly are valuing companies at high multiples of their earnings, factoring in the future growth of these stocks.
But Shah mentions that "nearly half of the market is discounting well beyond 2074." So, is pricing stocks well beyond 2074 reasonable as if these stocks will sustain huge growth for 74 years? Time will tell.
However, Shah exudes confidence that "Stronger earnings Growth can bring down PE ratio or valuation. Listed India Inc.'s Profit to GDP Ratio has grown threefold in the last few years. So it is fair to assume that broad market earnings growth will follow nominal GDP growth."
He limits the downside potential of BSE 500 stocks saying, "Triveni Sangam of fundamentals, liquidity and sentiment puts floor on the downside of the market. Likewise, valuations will cap the return potential of the market."
He feels returns will moderate over the medium term, and "reasonable valuations over expensive valuations will outperform over the medium to long term."
