2 weeks ago
Rising Bond Yields Could Pressure Nifty Valuations, Expert Says
Bond yields show how much investors can earn from lending money relatively safely.
When those yields rise, stocks may look less attractive by comparison.
This can make investors pay less for companies whose profits are expected far in the future.
Niharika Tripathi said the Nifty may therefore face pressure if yields stay high.
However, strong company earnings could help offset some of that pressure.
For example, a fall in the Nifty’s valuation multiple would require faster earnings growth to keep prices stable.
Higher oil prices, a weaker rupee and foreign investor selling are also affecting Indian shares.
Investors may prefer companies with strong balance sheets, steady cash flow and profits that are visible soon.
Niharika Tripathi of Wealthy.in said sustained higher real yields could compress equity valuations, especially for companies dependent on distant future cash flows.
The US 10-year Treasury yield is near 5%, while India’s 10-year government bond yield is around 7.1%.
If the Nifty multiple fell from 20.5 to 18 times earnings, companies would need roughly 14% earnings growth to keep the index price broadly unchanged.
Indian equities are absorbing the shock through higher domestic yields, elevated crude prices, rupee pressure and foreign investor selling, but the full impact may not yet be reflected.
The environment could favor financially strong companies with visible earnings, free cash flow, reasonable valuations and lower financing needs.
- Who
- Niharika Tripathi, head of products and research at Wealthy.in, provided the assessment.
- What
- She said persistently elevated bond yields could compress Nifty valuation multiples and increase the importance of earnings growth.
- Where
- The potential impact is on Indian equities, particularly the Nifty.
- When
- The assessment concerns the recent rise in global and Indian bond yields.
- Why
- Higher yields increase the return available from lower-risk assets and raise the discount rate applied to future corporate earnings.
Persistent Yield Pressure
Stabilizing Yields
Nifty valuation outlook
Persistent Yield Pressure
If yields remain elevated, investors may demand higher earnings yields, causing further P/E compression and making distant-growth companies more vulnerable.
Stabilizing Yields
If yields stabilize and Indian earnings growth remains strong, equities could absorb the shock over time.
Investor preferences
Persistent Yield Pressure
Investors may move away from businesses priced on distant growth assumptions and favor companies with near-term cash flows and lower financing needs.
Stabilizing Yields
There may not be a blanket shift toward large-cap or value stocks; quality growth at reasonable valuations could remain attractive across market segments.
Key facts
- US 10-year Treasury yield
- Close to 5%
- India 10-year government bond yield
- Around 7.1%
- Illustrative Nifty valuation
- Around 20.5 times earnings
- Earnings growth needed at 18x P/E
- Roughly 14% to offset the decline from 20.5 times
- Earnings growth needed at 17.5x P/E
- About 17% to provide a similar offset
- Additional market pressures
- Elevated crude prices, rupee pressure and foreign investor selling
- Potentially favored companies
- Businesses with strong balance sheets, visible earnings and consistent free cash flow
Sources
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