The recent drop stock market may have made some stock investors believe a plenty of stocks are now trading at deep valuation discount to historical averages and, thus, are a good value buys. But Kotak Institutional Equities differs a bit.
Kotak said the the new world order seems to be based on the rule of might, tribalism and territorial conquests against the post-WWII (1945-2020) world order that was based on the rule of law, multilateralism and territorial integrity of nations.
The domestic brokerage felt the conventional valuation framework of using the historical average of multiples to fix a target multiple may be inadequate to factor in the increased uncertainty and risks to companies’ earnings from higher geopolitical and macroeconomic (tariff, trade) risks and faster industry disruption.
"This should reflect in a higher cost of equity (higher risk premium) or lower multiples," it warned.
The brokerage said the traditional market heuristics may need to be replaced with a deeper approach, given the large changes to geopolitics and global macroeconomic situation and industries and companies.
It gave an example consumer staples, which it noted are treated as 'defensives' by the Street. It said the Street is happy to accord the same multiples to consumer staples as pre-pandemic levels despite significantly lower volume growth rates currently. Similarly, the heuristic of lower crude oil prices resulting in higher margins for paint companies may have been valid in the past, but it may not be relevant in the current industry structure with more competition, it noted.
Kotak said the new world order seems to be a throwback to most of human history, with constant conflicts between tribes, kingdoms and empires.
"A narrow elite benefited from this constant anarchy and conflicts (apart from periodic violent overthrow of the elites). It can be safely assumed that confidence about the future is essential for households to consume and companies to invest. This may be at risk. The recent sharp downturn in US economic indicators may reflect this loss of confidence (hopefully temporary)," it said.
In the world order post World War II, the resulting geopolitical peace -- despite the Cold War era, contributed to massive economic growth.
"The 1945-70 period saw high growth in per capita income in advanced economies and (2) the 1990-2020 period saw large growth in per capita income in LDCs (see Exhibits 2-3). It can be safely assumed that (1) geopolitical stability, (2) globalization and (3) open trade contributed to the golden period of economic prosperity for humankind," it said.