New Covid strain: Stock valuations were at 25-yr high before Monday’s fall

The gravity-defying run on the Indian bourses came to an abrupt halt on Monday as investors braced for a fresh round of economic disruption after a new fast-spreading strain of coronavirus was detected in the United Kingdom. The benchmark indices witnessed their biggest one-day fall (in terms of points) since March this year. The widely traded Nifty50 closed the day 432 points lower (down 3.1 per cent), while the Sensex was down 1,407 points.

Many analysts believe a big correction was inevitable and the discovery of a new coronavirus strain was only a trigger. Prior to Monday’s fall, the Nifty50 had rallied for seven consecutive weeks — one of its biggest winning streaks in nearly a decade. The rally led to nearly 2,100 points, or an 18 per cent, rise in the index since the end of October. “The fall was inevitable given record high valuation and almost one-way rally in the broader market in the past two months. The latest news from the UK was just an immediate trigger,” said U R Bhat, director, Dalton Capital Advisors.

The Nifty50 index ended Friday with a price-to-trailing earnings multiple of nearly 38x — the highest since 1999. Its cousin Sensex was valued at 34x its underlying trailing 12-months earnings per share (EPS) — most since December 1995.

At the close of trade on Friday, the Nifty was up 81 per cent from its March low, despite an 18 per cent decline in the index EPS during the period. Its current EPS of Rs 364 is the lowest in nearly seven years and down nearly 20 per cent from the record high of Rs 450 before the pandemic in January this year. After Monday’s fall, the Nifty closed the day with P/E multiple of 36.7x — the lowest in the last 10 days, but nearly 70 per cent higher than the historical average of around 22x.

Analysts said the growing mismatch between the stock prices and the underlying corporate profitability has raised downside risks for investors. “The vulnerability of the market was high due to quick gains made in the ongoing rally, leading to low margin of safety,” said Vinod Nair, head of Research at Geojit Financial Services.

The fear is compounded by a sharp correction in commodity prices, including crude oil and industrial metals, as investors now worry about the pace of the global economic recovery after various countries imposed a ban on flights from the UK.

Metal and energy companies were the biggest gainers on bourses in the last two months driven by a rally in crude oil and industrial metal prices. Not surprisingly metal and oil & gas index were the top loser on the bourses on Monday.