06 Jul , 2022 By : Monika Singh
Equity valuations have stabilised as the ‘unfettered inflation’ argument weakens because of retreating commodity prices, ICICI Securities said in a research note on Tuesday. The key argument for a sharp downside in equity valuations is being driven by the extreme fear of a structurally-rising inflation and bond yields like the one observed during 1960s-80s in the US, thereby, resulting in an environment of significant underperformance for equities, the note said.
However, after the initial shock, due to the sudden escalation of Russia-Ukraine conflict, global commodity prices across the board have started declining along with freight rates, which weaken the structural inflation argument due to commodity prices. Also, the feared wage-spiral conditions are unlikely given the softening outlook for job market going ahead as growth moderates.
Although CPI inflation in the US has not yet started to decline, the equally important core PCE inflation continued to dip for May 2022, while US 10-year bond yield dipped sharply to below 3?ter spiking to almost 3.5% in June. India CPI also showed signs of slowing down in May 2022,” ICICI Securities said
Valuations remain reasonable with ‘earnings yield’ of around 6% and ‘asset valuations’ in terms of P/B falling below long-term average at 3x while the aggregate ‘market cap to GDP’ ratio stands at around 100%, the note said. High-frequency growth indicators for the first quarter of the current financial year are robust, with average PMI manufacturing at 54.4 and PMI services at 58.4 being robust.
Export growth at 16.77% YoY for June and GST collections at Rs 1.45 trillion for the same month are also impressive. Among other indicators, the core sector growth in May was 18.1% YoY and the non-food credit growth in June stood at 12.6%, the research note said.
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