is market fairly valued or not?
understanding few basic concepts
The earnings that we generally expect to grow by 14-15% every year, assuming the real growth of GDP to be 8% and inflation to be 6%.
In the last 4-5 yrs the GDP growth has disappointed. (1/n)
That does not mean we believe the growth rate expected in future should be lowered, we still believe based on RBI and govt comments that India is a country where to employ the large number of people that join the workforce every year, we need 8% real GDP growth and (2/n)
to achieve that three forces would work,
1) the industrialist themselves
2) RBI might help by lowering interest rates or use other ways to increase economic activity if the industrialist themselves cannot increase their earnings .(3/n)
3) finally the govt by giving fiscal stimulus which can come from n number of ways.
going back where i invested in nifty on 29th june 2012, nifty was at 5278 and the PE ratio was 17.51
Price = Earning * PE ratio
(4/n)
Rearranging the same equation:- Earning = Price / PE ratio . i.e. Earning = (5278/17.51) = 301
Today when the Nifty is trading at 11724 and Pe ratio is 29.26
Earnings today are (11724/29.26)= 400.68
If you calculate the growth in earnings , CAGR 4.17%.
(5/n)
So you understand the growth in Nifty is mostly because of increase in PE from 17.51 to 29.26
Now the million Dollar question Should we sell today, considering your CAGR including dividends would be close to 15%.
(6/n)
1) No doubt the PE is high, (But earlier the safest option you had was bank rate of say 8%. So P/E for a bank FD would be 100/8 = 12.5, to earn 1 rs in the bank you had to invest 12.5 rs . Today the bank rate is 6.5%, i.e. the P/E for bank FD is 100/6.5 = 15.4,
(7/n)
to earn 1 rs in bank you need to invest 15.4 rs
Remember Warren says Interest rate is to the stock market what gravity is to objects on the planet. If the gravity is low, objects move up and if gravity is high, the objects go down.
(8/n)
Similarly as interest rates go down the premium we pay for the markets go higher. So the PE of 27 which was considered to be high earlier, is though high but cannot be compared to 27 when interest rates were 8%.
(9/n)
Note I have not considered tax to be paid on interest in both cases. But all said no doubt the markets are not horribly cheap as of now.
(10/n)
2) Big IPOs are being able to raise money. I think the biggest IPO of this season is GIC around INR 12000 crores. Still smaller to Coal India INR 15000 crores and very small considering the GDP size would have more than double in 7 yrs.
(11/n)
Also the over subscription is nothing as compare to Coal India or R power IPO . So we are looking for a very big IPO also where the retail participation shows euphoria in terms of over subscription. But no doubt the IPO market is slightly euphoric.
(12/n)
3)The only silver lining is extremely low earning growth. The earnings growth which is horribly low, if earnings start to increase, even if PE ratio does not increase, markets can go higher.
(13/n)
4)last but not the least MCAP to GDP ratio
current mcap to gdp is somewhere near .8 to .9
in 2008 it was 1.5 so
2 points
a) u just cannot compare pe ratio of 2008 with 2019 to show market is expensive as at that point earnings were at top nd here its at bottom
(14/n)
b)mcap to gdp is near 0.8 which it was at 1.5 in 2008
so mcap to gdp is very low so far
so again we just cannot compare situation of 2008 nd current on base of just PE which i guess almost is doing
(15/n)
so yes market is not cheap nd yes its not horribly expensive
we r somewhere reasonably valued.

So we are not selling, though if the earnings don’t come in next few quarters the sentiment might get hurt which might take the price lower.
(16/n)
But we cannot predict such peaks and bottoms. Like the 2015 Jan – March was also a small peak. When I look back today , I definitely feel, it would have been great to sell at that peak and buy again later, but that’s our limitation
(17/n)
we don’t try to predict such moments, we only act when its very clear, for us it would be clear only when P/E and earning growth rate both would be high.
(18/n)
Remember Warren Says “In stock Market Rear view mirror is always clearer than the windscreen”
But yes, anything that you require in next 5 yrs should not be in the stock market, not because of the levels of market today
(19/n)
but because in the short term markets will always be unpredictable.
so keep sipping nd keep investing, dnt wait for burst.
#investing
#pe
#nifty
#ETFS
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