Most Sectors Trading Below 5-Year P/E Even as Q2 Shows a Bounce
A recent analysis indicates that many sectors are currently trading below their five-year Price to Earnings (P/E) ratios, despite a rebound in Q2 profitability.
– BFSI and IT Sectors: According to ANI Pandey, Nifty heavyweights in the Banking, Financial Services, and Insurance (BFSI) sector, along with IT companies, are trading below historical P/E multiples. This creates a potential upside for investors.
– Sector Performance: The study by ETIG reveals that two out of three sector indices that experienced the most robust profit growth in Q2 are trading above their long-term averages. Notably, metals, consumer durables, and oil & gas sectors boasted impressive profit surges ranging from 24% to 40% year-on-year.
– Earnings Growth: Vikas Gupta, CEO of OmniScience Capital, points out that the top sectors for year-on-year earnings growth—oil & gas, metals, and consumer durables—are cyclical. However, most other sectors show either modest profit increases or declines, leading their valuations to fall below both five- and ten-year averages.
– Current Market Outlook: While sectors like metals and oil & gas reflect strong current uptrends, their sustainability may be uncertain in the near future. Pankaj Pandey from ICICI Direct emphasizes that the oil and gas sector’s earnings growth is primarily due to enhanced gross refining margins (GRMs) and improved profitability, which affect the overall P/E landscape.
– Investment Recommendations: Experts recommend focusing on the Nifty PSU banks and Nifty banks, which appear undervalued compared to their historical P/E ratios. Gupta suggests an overweight position in these areas, while select steel companies like Tata Steel are also positioned for potential gains.
In summary, while many sectors are currently trading below their five-year P/E ratios, potential opportunities exist in BFSI and select industries. Keeping an eye on earnings growth and market trends will be essential for investors looking to optimize their portfolios.