Well…the blogpost might not be as interesting as the title. I think I am getting influenced by Bollywood masala.
Anyway, I seem to have this strange obsession with Nifty valuations and how good an indicator it is of the broader market. Here are a couple of posts that I already posted on Nifty
Continuing with this obsession, I have the following piece of data on Nifty –
|FY||Avg. P/E||Avg P/B||Avg Div Yield||Avg. Nifty||Avg Nifty EPS|
With lot of talk on whether the market is overvalued or undervalued (‘experts’ swinging either way with reasons ranging from Japan earthquake to Anna Hazare’s impact on the Indian economy), I decided to let data speak for itself (mind you, 10 year data might not be statistically significant, but nevertheless). Here is the data on the Avg. Nifty Growth versus Avg. Nifty EPS growth.
|FY||Nifty growth (%)||EPS Growth (%)|
The data table doesn’t speak much, does it? Here is a graph to depict that data –
As the graph indicates, over a period of 10 years, Nifty growth followed EPS growth (as should be the case). For example, during the 2006-2007 phase, although EPS growth declined dramatically, Nifty refused to budge. The arrival of 2008 sparked panic and husha-busha happened.
As you can see for the current year, the EPS growth is only slightly ahead of Nifty growth indicating fair valuations. At current valuations, according to the graph, the Nifty is neither overvalued nor undervalued. So much for the noise on CNBC.
So, what are the stocks that we can invest based on this post? I have no clue.
So, what was the purpose of the post? Precisely not to trust market experts and let them swing you this way or that. Data will tell you everything you need to know, if you are willing to dig enough.
Excepting serious unforeseen circumstances (like crude shooting upto $200 and staying there for a while or another war or another calamity in India), we can expect normal growth in Corporate India results (approx. 10-12% y-o-y, assuming 8% GDP growth in real terms). Conclusion being, any serious correction from these levels (due to FIIs pulling out, unwinding of yen-carry trade or some such fantastico reasons) would result in Nifty getting undervalued and hence should be a time for accumulation of your favorite stocks.
Again, as this post suggests, once Nifty P/E goes below 20, risk-reward equation turns in your favor.
Disclaimer: This is not investing advice. It is just a rambling and an obsession I seem to have with Nifty. That is all.
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