Where will the market move now? Track these 10 ratios to gauge the pulse

In a cleverly worded address, the US Federal Reserve Chairman said he would start tapering but keep interest rates low. And, like someone who goes blind in spring, the market saw only greenery all around.

Benchmark indices across the world have hit fresh record highs, almost every other day. But such an exuberance has also kept experienced traders on toes as they know when the tide turns, the situation will unfold even more quickly.

If you are among those who are confused, here are some key indicators that may help you read the pulse of the market:

BEER: With the recent run-up in the largecap universe, the bond equity earnings yield ratio (BEER) is trading slightly above its long-term average, which indicates the stock market is slightly expensive at the current levels as against the bond market.

Buffett indicator: India’s total market cap to GDP ratio, also known as Buffett Indicator, is trading at 126 per cent, above its long-term average. With this positive earnings momentum in the current cycle, we are likely to see higher levels of market cap to GDP in the upcoming quarters.

1-year forward PE: Nifty is currently trading at 22 times 12-month forward PE, 2.5 standard deviation above its long-term average. It is also trading slightly above 1.0 std on 12-month forward PB. The top 10 stocks in the Nifty are trading at 26 times and the remaining 40 are trading at 18.5 times forward PE.

Sector valuation: At the current levels, PSU banks, energy and metal indices provide valuation comfort, as their 1-year forward PE is in line with the 10-year average. On the other hand, valuations for the IT, pharma and auto sectors are expensive. IT sector’s valuations are likely to persist on account of a strong structural theme emerging in the sector, market commentators say.

Nifty vs VIX: Volatility has significantly reduced in the last four months and the volatility index is continuing with its downward trajectory. During the last month, VIX was trading around 13 compared with the long-term average of 22, indicating a positive setup for the market with limited downside. If VIX continued to head south, it would trigger a further rally in the broader market, said analysts at Axis Securities.

India Valuation Index: Axis Securities’ market valuation index has retracted back to the cautious zone after a recent run-up. Current levels indicate some profit booking, especially in largecaps. Stock picking and sector rotation are keys at the current levels to achieve outperformance.

Return on equity: The RoE is improving across all market caps but smaller stocks have been showcasing significant improvement. The RoE of cyclical sectors has improved in the past year. Moreover, current ratios are higher than those seen at the pre-pandemic levels. Significant improvement has been seen in PSU banks in the last three years. Automobiles have improved on a YoY basis but are still far below the levels seen in 2018.

Advantage midcaps: From a valuation perspective, midcaps look relatively attractive over largecaps, analysts said. Besides, the recent spate of IPOs and their successes clearly indicate the market’s appetite for mid and smallcap stocks. Midcaps are trading at 10 per cent discount to largeaps. This compares to a 45 per cent premium during the 2017 bull run.

Earnings to support growth: Analysts at Axis Securities said FY22-23 Nifty earnings would be at Rs 706-806, up marginally by 1-2 per cent, after June quarter results. The growth would be primarily supported by metals. Consequently, their Dec 2021 target has also gone up 2 per cent to 17,700, valuing Nifty at 22 times on FY23 earnings.

Financials at strong footing: Bank and financial stocks are finally doing justice to their clout on the Street. The last four quarters’ cumulative net profit has reached an all-time high, crossing Rs 7 lakh crore in the June quarter, largely thanks to this sector. Financials are now contributing significantly to net profit — 22 per cent versus 6 per cent in Q1FY19.