The Sensex may have come off its 60,000 peak, but by no means is it cheap, considering that it is trading at a 12-month trailing PE of 31x. In fact, of the 50 Nifty 50 stocks, more than 55% of the constituents are trading at a premium to their historical averages. Against such a backdrop it is not surprising that one of the country’s well-known proponents of value investing does not see value in the market.

“The market today is fairly valued, and only a fourth of the market still offers good value. So, one should moderate their return expectations [from equities] and think long term,” says Prashant Jain, ED and CIO at HDFC Mutual fund.

However, Jain does see a reason why equities have been on the boil. “To begin with, a stock represents the discounted value of profits for a long period of time. So, let’s assume, if the economy was not doing well and profit was hit for a year, at best, it would have impacted not more than 5% of the fair value of a business. More importantly, we haven’t seen meaningful impact on profits,” explains Jain, who oversees ₹1.24 trillion in equity assets.

In FY21, net profit as a percentage of the gross domestic product hit a four-year high at 2.6%, though it’s a long way away from the peak of 7.8% seen in FY08. In fact, Q4 of FY21 saw the net profit of the top 200 companies more than double led by strong earnings, driven by cyclicals.

Jain points out that FY21 was a unique year that saw a strong resurgence in profits owing to a variety of reasons. “Banks witnessed the end of the corporate NPA cycle. Businesses such as IT, pharma, and FMCG did not experience any significant disruption. Utilities also did not experience any major pain. Metal prices shot through the roof and that helped profitability,” explains Jain.

Though auto, multiplexes, retail, restaurants, airlines, were the only sectors that were impacted, Jain points out that these account for a small part of the market, but the big trigger for the rally came on account of the lower cost of capital. “The cost of capital has come down, the world over, in response to the pandemic. If you bring down the cost of capital, why will asset prices not go up? So, I am not surprised by what has happened, and I don’t think there is any disconnect between the market and the economy,” feels Jain.

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