A tango: India mkt valuation rises as US bond yields ease

The Indian equity market valuation has been moving in tandem with the US 10-year treasury yield.

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While the benchmark US bond yield has witnessed a nearly 70 basis point decline since the end of October this year, dropping from 4.93 percent to 4.23 percent on Friday, the Sensex earnings yield has slipped by nearly 45 basis points from 4.5 percent to 4.05 percent.

Previously, Indian equities' earnings yields rose in sync with the US bond yields. The Sensex earnings yield climbed by 46 basis points between July and September, shadowing the 96 basis point rise in the US 10-year bond yield.

Earnings yield, the inverse of a security's price to-earnings (P/E) multiple, is the potential dividend for an investor if the stock pays out all its annual profits.

A higher earnings yield means a lower P/E multiple and vice versa. The benchmark index trailing 12-month P/E multiple ballooned to 24.72x on Friday, from 23.72s at November's end and 22.3x at October's end. The index trailing earnings per share dipped slightly from ₹2,858 at the end of October to 2,425 on Friday, meaning the index gains came solely from a rise in valuation.