ICICI Securities: Equities enter high optimism zone; expect sub-par returns ahead: ICICI Securities

It has maintained that such circumstances set the stage for sub-par returns ahead. “Historically, the expected 1-year returns for Nifty50 have been sub-par above the 20x P/E valuation range,” it added.

On the basis of the historical performance over the past two decades, the 1-year forward average and median returns for the benchmark index stand at 3% and 1%, respectively, whenever it has traded in the 20x-22x P/E multiple range.

This is against the 12% expected annual return, which Indian equities have produced over the long term (10-year rolling returns) since 1990.

However, the brokerage cited reasonable prospects of moderate positive returns in CY23E as it expects earnings expansion to continue and quantitative tightening cycle to ease in the coming year.

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Over the past two decades, Nifty50 has given positive returns on 66% instances and negative returns on 34% instances over a 1-year period starting at a valuation range of 20x to 22x forward P/E ratio.

Domestic demand continues to be robust for corporates while input cost pressures for manufacturers recede, thereby improving prospects for earnings going ahead, said the brokerage.

It has cited high-frequency indicators for November 2022, including PMI data which rose about 55%, GST collections topping Rs 1.46 lakh crore and petrol-diesel sales rising more than 10% on a yearly basis.

The investment climate and credit growth continues to remain robust, said ICICI Securities. “The combined capex of the government and listed corporates could touch Rs 21 lakh crore in FY23 going by recent trends.”

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Real estate demand continues to be robust going by the property registration data for November from urban centres like Mumbai, despite the sharp rise in interest rates, it said.

Global environment for equity valuations has improved with the fear gauge VIX dipping to pre Covid-19 levels and bond yields declining sharply, the report suggested.

Bulk of the incremental data available over the past one month is indicating declining inflation both in the US as well as India. The US Fed has indicated that the pace of rate hikes could moderate going ahead, which bodes well for markets.

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The brokerage sees clear prospects of earnings buoyancy going ahead, given the strong earnings trajectory of financials, declining input cost pressures for manufacturers, and resilient domestic demand environment.

“However, companies tied to global demand are likely to have a weak growth outlook,” it added in the report.

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