The economy has suffered a lot due to the ongoing pandemic. The weak US market, global tech correction, weak GDP, and border tensions with China have played spoilsport with the markets rise. This will continue to keep stocks on the edge this week. Investors are also taking some money off the table. Markets are overbought, while estimates are extended. In a recent note, Jefferies India analysts said: “Nifty is up 57% from 23rd Mar lows. The 1-year forward Nifty EPS has seen a downgrade of 26% since then, although it is up 1.6% since bottoming 3 weeks back."
The 1-year forward Nifty PE at 21.1 times on consensus earnings was last seen only during the tech bubble of 2000." Of course, When adjusted against the risk-free rate, valuations appear reasonable, notes Jefferies. Even then, caution is warranted. The June quarter GDP was a nightmare. The Indian economy contracted more than 23%, more than expected. The informal sector, which is not captured in official GDP data, continues to reel under the pandemic. In fact, other indicators point to more pain ahead.
In August, the manufacturing purchasing managers’ index (PMI) rebounded to the expansion zone crossing the crucial 50-mark for the first time since March. However, the dismal state of Indian services providers took a toll on overall business activity. Consequently, the Composite PMI data is still in the contraction zone at 46 in August. Further, the goods and services revenue collections, which fell 12% year-on-year basis, for July collected in August, didn’t give much hope of recovery.