Are the markets overvalued across capitalization?

An analysis of the price to earnings (PE) ratio (trailing PE) across market capitalization sourced from Starfolio, a market research company reveals that valuations of large cap companies are attractive.

The study shows that large cap, bank and broader market indices are either trading at par with or less than their long term average PE.

The current PE ratio of Nifty 50 is 23.40x compared to its 5-year average PE ratio of 25.44x. Similarly, Nifty 500 is trading at 27.20% compared to its 5 year average of 27.50%.

Further, large and midcap, midcap and small cap indices are trading at higher valuations compared to their long-term average.

Let us look at the table to know more:

Source: Starfolio, a market research company

Christy Mathai, Fund Manager, Equity, Quantum MF believes that majority of stocks in equity market are overvalued. He said, “While long term valuations of large cap companies look attractive, the difference is due to covid. There was a period of no returns in 2021. In my view, only banks offer attractive opportunities in terms of valuation.”

Harshad Patwardhan, CIO, Union Mutual Fund feels that large cap companies are more attractive compared to mid cap and small cap companies with respect to risk reward metrics. “In fact, the forward PE ratio of Nifty 50 also indicates that majority of large cap companies are available at attractive valuation.”

Talking about the valuation, Mirae Asset MF said that over the last 12 months, mid/small-cap indices have outperformed the Nifty 50 by 31/45% respectively, with some sectors particularly amongst industrials trading at a premium. It said, “Overall, we don’t see much deviation in current policy construct and expect earnings momentum to continue. We prefer large-cap oriented funds and hence any fresh allocations may be made in diversified funds like large cap, Flexicap and Multicap. Hybrid funds, given their flexibility in asset allocation may also be made part of core portfolio.”