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The recent correction and sustained underperformance of the domestic stock market relative to other global markets may not be a temporary phase but could indicate a deeper, more permanent reset in market valuations, according to a report by Kotak Institutional Equities.
The report highlighted that Indian equities are facing growing disruption threats across sectors, while Indian companies have not made meaningful investments to counter these challenges. As a result, the report believes this could eventually lead to a structural decline in market multiples, bringing them down to what it terms "correct" levels. It stated "the recent correction in and continued large underperformance of the Indian market versus other markets simply reflects a 'temporary' blip in the market or the start of a 'permanent' reset in multiples to their 'correct' levels. Several sectors and stocks would see an even larger correction in multiples (price and/or time) if the latter were to be true". These levels would be better aligned with current business models and the emerging economic reality than with historically high valuation multiples. The report noted that the de-rating of Indian equities has so far been delayed due to price-agnostic buying by retail investors. However, this factor alone may not be sufficient to sustain elevated valuations over the long term if structural issues persist. Investors, according to the report, generally attribute the weakness in the Indian market to three key factors. These include the high valuation multiples of Indian equities, comparatively lower valuation multiples in other markets, and the lack of high-technology companies in India. This absence stands in contrast to the presence of several established and emerging high-tech firms in other emerging markets. However, the report cautioned that investors may be overlooking a more concerning issue. The report questioned whether the ongoing correction and the continued large underperformance of the Indian market relative to global peers represent a temporary disruption or the beginning of a permanent valuation reset. The distinction between these two possibilities is critical, the report said. If the current trend reflects a permanent reset, several sectors and individual stocks could face an even sharper correction in valuation multiples. This correction could occur through further price declines or through extended periods during which prices remain subdued. The report suggested that such a scenario would align valuations more closely with the underlying business fundamentals and the evolving competitive landscape, particularly in light of technological disruption and changing sector dynamics. Overall, the report noted that while market participants may continue to debate near-term triggers, the longer-term concern is whether Indian equities are entering a phase of structural revaluation that could redefine return expectations across sectors. (ANI)
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