Nifty overvalued by 20%? Kotak sees time correction in next 6-9 months

Kotak Institutional Equities in its latest quant research note said its fair value model for Nifty suggests that the 50-pack index is now close to 20 per cent overvalued. The domestic brokerage does not anticipate a large upside to the index from this point. The most likely outcome for the index in the next 6-9 month period, it said, seems to be a time correction.

"The median pairwise correlations continue to be close to their long-term average. There was a slight uptick in index volatility in December. There were net upgrades to the EPS estimates in December, although the total number of estimate changes was low," it said.

Kotak said the returns in 2024 will depend on the tussle between fundamentals and sentiment. In an entirely ‘fundamental’ market, returns will likely be modest for the market and negative for many stocks.

A bottom-up plug-in of 12-month fair value for individual stocks shows a modest 1 per cent upside for the Nifty-50 index, Kotak said.

"In a less-than-fundamental market, market returns can vary, as it is impossible to factor in sentiment in any market calculus. Thus, we are amazed by the general obsession with forecasting prices (versus deciphering value) and awed by most participants’ purported ability to forecast prices," it said.

Kotak said any market correction will be entirely based on a big change in the market’s expectations of potential returns.

"We have no idea though as to what will change the market’s bullish return expectations, which have been reinforced by the stellar returns of the past three years for ‘new’ retail investors. We can point to a few fundamental factors, such as earnings downgrades (although earnings misses are passe in the current state of irrational exuberance) and higher-than-expected interest rates (unlikely)," Kotak said.

Increased focus on fundamentals versus flows may result in a correction, but "we wonder why investors ask this question but stay invested," Kotak wondered.

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