Is the Current Indian Market Overvalued?
This year the Indian capital markets have surged 27 per cent gained since the beginning of 2017- NIFTY50 from 8,179 points to 10, 370 currently, with a lifetime high of 10,490.45 in the month of Nov 2017. The YTD return of NIFTY50 is 30.50 percent on Nov 29 2017. As on Oct 31 2017, one year CAGR is 19.82, 5 year CAGR is 12.96 and have a CAGR of 11.20 per cent since inception.
With the Nifty soaring to its all-time high levels, it is also becoming increasingly expensive as measured by price-to earnings (PE) ratio and the Indian stock market is currently trading at a PE of 26.59, with 2.25 times its standard deviation, while the mean PE is 19.13.
NIFTY 50 PE Chart Since 1999 ? 11/24/2017
Source: nifty-pe-ratio.com
As the chart shows above if we analyze the top and low value of the PE the following pattern will emerge:
Source: nifty-pe-ratio.com, compiled by Wealth Discovery Securities Pvt. Ltd.
At the same time if we see the NIFTY50 Index chart it shows you a continuous uptrend pattern over a long time period with little fluctuation over the short term period.
NIFTY50 Index Chart
Source: moneycontrol.com
EPS Growth Chart: from Jan 99 to Jan 17
EPS Chart: from Jan 99 to Jan 17
What does a PE ratio means? Of course it is valuation matrix to judge the expensiveness any stock or index. PE is a function of Price and Earning, and in general high price ratio is taken as expensive or overvalued compared to same class of assets. Now if we take the price (Index in this case) it shows an increasing trend over a long period, but the PE is fluctuating frequently over in a range of 28.47 (high) to 10.68 (low) over the period. In general market reacts positively by expanding PE as a result of EPS growth of expected EPS growth. But actually a lot of other market factors also play a major role in the market and thus the correlation link between EPS and PE doesn?t fit properly always.
Rallies in market are either judged on rising EPS or P/E expansion. When P/E is expanding it means that the investor’s sentiments are getting more bullish and the expectations are of faster pace of growth than what it is currently.
India Companies has managed to mostly meet street expectations with its second-quarter performance so far, with 14 out of the 23 companies NSE Nifty 50 companies reporting earnings as on 30 Oct 2017 in-line with the forecast.
After any quarters, this quarter earnings were in line with expectations, leading to stabilizing of EPS. This could be a sign of revival in earnings growth. EPS is not growing and P/E is expanding. The market can remain irrational for long as the history shows, between Jun 2007 to Jan 2008 the P/E rose from 20.5 to 28 and earnings barely grew 9%. If earnings don’t show signs of growth in coming quarters, the market could correct significantly.
The Benchmark Index has had a very strange relationship with economic growth. In the year 2017, the oddity has become more pronounced with GDP growth slowing down and markets touching lifetime highs. Nonetheless, Nifty remains a broad reflection of the Indian economy… And of the structural changes within it.
At present, the Indian economy stands at a turning point. Multiple structural and regulatory changes such as automation, GST, digitization, the renewable energy drive, etc. are in play.
We can say Indian Market is Expensive as PE of 26.87 compared to other market as US S&P 500 PE Ratio is 25.24, UK FTSE 100 PE is 32.9, Hong Kong HANG SENG PE is at 4.2 and France CAC 40 PE is at 25.4. But whether it is overvalued or not is still a question. If the future EPS will grow, Interest Rate will be remain low, Inflation Rate will be low, GDP will grow, and macros economic data shows a positive trend, than Market will remain in its growth trends irrespective of its current valuation.