All-time high valuations
Updated: Sep 19
Indian stock market is currently witnessing unprecedented valuations. As I write, Price Earnings multiple of NSE 500 is a whooping 37x. Is this going to stay or we are at the brink of an anytime tumble?
A dig at historical Price-Earnings trend is important to understand the present scenario . The below table shows PE averages during the last two decades.
* until September 8th 2020
The evident information from the above table is that PE multiples has seen rise every demi-decade.
A quick check over last five years reveal strong & sturdy PE Valuations. In the last four years PE was in the range of 29 - 31. The year 2017 had seen a sharp increase in PE and thereafter it has retained its buoyancy. The average PE multiple over last five years stood at 28.7 times. The below table lists average annual PE for last five years.
* until September 8th 2020
Month by month trend of PE in 2020 (so far) showed sharp fall over pandemic concerns followed by a quarter of weak sentiments and subsequent meteoric rise to an unparalleled level. The below graph sums it all.
Three interesting takeaways so far:
✔ Four consecutive demi-decades has shown rise in PE of NSE 500
✔ Average PE in last 4 years hovered between 29 - 31 times
✔ Current PE at 37 times is at all-time high
Is this a reflection of India's sustained economic development & sound prospects?
The prevailing high PE is also because of last two quarters of poor earnings of many corporate. PE multiple is usually based on trailing twelve months (TTM) of earnings and we could see markets hovering at a little higher PE than its previous averages for another half-year or so.
The PE growth is substantially led by sectors like pharma & healthcare, FMCG, Automobile & ancillaries. The below graph captures month-wise PE movements across different sectors for the year 2020
Pharma sector saw the biggest gains as pandemic only created increased demand for medicines. FMCG & IT sector saw less severe impact during the nationwide lock-down which was followed by a quick recovery.
The stock markets are cruising at very high level and we expect a sharp correction of up to 20% to happen anytime. No one can however define as to when and what will trigger it? The reason for trigger can be anything and doesn't need to be important. Something like a sparrow attributed for a twig to fall apart. It's just that the tiny branch was to break and the sparrow sitting on it was a mere coincidence.
Profit bookings should happen anytime now and so our strategy is not to stay invested all-the-time. As of today, about 70% of our corpus is sitting in respective bank accounts. This period is for fishing out quick trading opportunities which we had advised in our previous blogs.
Though this is not the best period for long term investments, the markets continue to provide good opportunities for booking 3 - 5% returns month on month. We have delivered close to 40% returns in the current rally (23rd March - till date) for our portfolio clients.
Stay healthy and trade with safety in mind.