“We are still not in a bubble zone, but there is a little bit of optimism,” Shah said in a virtual press conference today.
At the end of December, the Nifty 50 index was valued at 21.7 times one-year forward earnings, a significant premium to the long-term average of 17.9 times.
On concerns over the widening gap between the stock market and the real economy, Shah said that market is merely factoring in the positive economic future. India’s economy is expected to grow in double digits in 2021-22 helped by a low base of 2020-21 and normalisation of the economy from the COVID-19 shock.
Shah’s comment comes on the back of the statement by Reserve Bank of India Governor Shaktikanta Das that the gap between the price of financial assets and the real economy was widening in the central bank’s latest financial stability report.
Nilesh Shah believes that strong corporate earnings growth will help support the market in 2021, and that the current high valuations have factored in much of this expectation.
The December quarter earnings of companies will indicate whether the earnings growth momentum seen in the September quarter will sustain, Shah said.
The veteran asset manager said that he expects some of the cost savings seen by Indian companies in the previous quarter to fade away but companies will be able to retain a large part of the cost savings generated by productivity gains.
Analysts expect earnings of Nifty 50 companies are expected to grow over 30 per cent and 20 per cent in 2021-22 and 2022-23 respectively, reflecting strong growth expectations for the underlying economy.
Kotak Asset Management Company also said that it expects the central bank to gradually normalise liquidity in the banking system and that the 15-month low December retail inflation print will ease the market’s concerns over reversal in the RBI’s stance on the policy front.
“We believe that the phase of normalisation (of monetary policy) has just begun, but it is not signalling a change in policy stance by the central,” said Lakshmi Iyer, chief investment officer – fixed income at Kotak Mahindra AMC.
Kotak AMC said that it sees a longer runway for cyclical sectors in the economy and is overweight on sectors like cement, private financial services companies, automobiles and industrials.
Investors should watch out for trends in the unemployment level in the economy, which is still higher than pre-COVID-19 level, and the heath of small businesses where the jury is still out on their recovery, Shah added.