If in fact there is a prediction of a correction based on past track record of high P/E, that seems to be exactly NOT a MC fallacy. Predicting market would not fall is MC fallacy.
The gambler’s fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future,
I see a question for Value pickr veterans on the nifty end 2018 levels.I don’t think these veterans invest predicting the market,they make their investments on the rationale of the business and have strategies based on different levels of market crash.They have sound strategies on what to do for different level of market corrections. If you follow Donald’s postings,you can see he clearly has strategies on what to do for his specific stock groupings for different levels of general market crash.
My personal belief is the trend is clear,we are in the middle of a big bull market and in between you would get sharp corrections to give enough chances to buy.But the hardest thing now is to find value and there is a risk of novice investors(like me) to get into junk stocks which is what we must try to avoid.
Regarding your comment about currently we are in the middle of a big bull market: This opinion is also shared by big time market gurus in various TV channels. I would very much appreciate if you can share the reasons behind the same, for my personal understanding. Thanks
Well regarding the bull market, I don’t think we need experts on tv to inform us, the price action on the tape gives us enough unbiased information…Also after the 2007-2008 crash the theory of india specific bull market doesn’t hold good for me. Our markets are just following the emerging markets and US… This bull market is mostly driven by liquidity and usually in first legs of bull market quality firms with good fundamentals run up and we have already witnessed… Now I feel the we are in next stage where also the promising but unproven names have started to run in anticipation of good show in future quarters, I believe the last leg will see people buying junk at steep valuations… Also if you see the demand for cryptocurrencies I am starting to believe there is tremendous excess liquidity in the system and it will continue for some time to come. From 2003-2007,the nifty went 6-7 x and just see how much our markets have made from the recent consolidated levels and make your own judgements
Is PE 26 going to be new normal for exiting then PE 24 as earlier? Treating entire stock as an asset class and looking at the money supply it looks like this.
I think its safe to assume that money supply has increased a lot in general and its safely trickling into stocks slowly so the prices are going to increase inspite of the fact that earnings are virtually stagnant for quite some years.
What can change this is
a. probably interest rate hardening? (slow event)
b. FPI withdraw large chunks … (quite probable)
c. black swan event (unpredictable)
I think 1 & 2 & 5 above has itself changed the money supply in the market that probably the PE of 25-26 will be same as PE of 22-23 earlier ?
Thoughts?
The situation is like you have so well expressed.
Each investor must make a personal decision to whether to buy and what to buy at Nifty PE 27.
Recently, Yogesh bhai explained how Bosch is a good company but not a good stock to buy due to stagnant earnings, and how 4 years ago its PE was 80 and it seemed expensive. After 4 years of consolidation PE is now 47, giving the investor very poor returns.
The money that pours in at these levels better be for the very long term, 5 yrs+
One more thing is that nifty in range > 24 for now 7-8 months. This itself is a rare event but clearly signify that 24 PE levels are no longer the earlier exit levels. Base has shifted upwards now so we should be ok with these new PE levels. This has another contour that nifty reaching 18-20 PE may be another rare event.
it reminds me of the book - this time is different!!! in 2007 it was India decoupling story. Now stock market being the only attractive asset class!! there is a difference between weather and climate and same way between short term aberrations and long term Valuations. it’s rare for long term averages to change just so easily.
The way I see it, market is looking forward to Q3 and Q4 results.
Q3 results will be the key. Almost everyone agrees that there will be double digit growth YoY in Q3 and even QoQ growth will be decent.
Question is, will the market need a growth of higher teen levels to stay at/above current levels or will it be satisfied with lower teens too.
And if we cross the Q3 hurdle without a “more than 5%” correction than I will ask the same question in Q4. Q4 is again expected to be a good growth quarter for YoY calculation.
It is likely that both Q3 and Q4 will be good growth quarters but the NIFTY itself will meander around 10500 levels which will in turn moderate the PE.
Considering that Q3 results are right around the corners, these some of these questions will be answered soon!
PS: What gives me nightmares is single digit growth in Q3, which can give a 10% correction to 9500 levels that people have been waiting for in 2017!
Hi @sarangg
Wondering how the non rebalancing passive hedge panned out as Nifty touched an all time high close to expiry. Do let us know of your learnings. Thanks.
I believe the 10k December puts were priced in September at roughly 210 which finally closed trade at 0.3 at expiry (with a high of ~400).
Regards
I see what you are saying. See the money supply angle and it looks quite real. A few days back my FD’s matured a good amount done 5 years back with decent interest rate. Now I want to do the same FD’s again but when I check interest rates its below 6 % and post tax yield is meagre 4 %. This itself is forcing me to take risks which lot like me didn’t take earlier. Think about pensioners (i agree they wont switch easily) but that loss of yield on FD’s, post office is making everybody hunting for yields and pushing money in stock markets. Yes its happening and its real. Will the bank interest rates go upward soon, I doubt it.
In 1992, markets reached PE of 48, it did not change the floor pe to 30 right? Interest rates are going down but that is a long transition…I remember my father putting in FD at 13% then it came down to 11% then 9% and now around 7%. That is a long term transition from under developed economy with high cost of capital to developed economy with very low cost of capital. But that will not change PEs of market permanently.
Financial crisis of 2008 in US was mainly caused by borrowers who borrowed heavily to buy big houses they could not afford and started defaulting on their loans. To contain the crisis, US Fed (and later other central banks) lowered interest rates so borrowers who were paying 8% interest on their loans could refinance their loans at 5%. But this saving came from the pockets of savers who’s return on fixed deposits dropped from 5% to 2%. Effectively Federal Reserve transferred billions of dollars of wealth from savers to borrowers by lowering the interest rates and keeping them low for a decade. Such a move was justified by Fed to save savers and borrowers from risk of defaults and world economy from another Great Depression.
At a high level, our Indian government appears to be on a similar inter-generational wealth transfer program by transferring wealth from older people to younger people by lowering interest rates. Govt has linked interest rates on small saving schemes with govt bond yields so interest rates on everything from PPF, EPF, POS, bank FDs etc have been dropping for last 2-3 years.
Older people who mainly hold their wealth in FDs and other safe assets have seen their income drop and either have to take risk (of investing in stocks and other risk assets that they are not familiar with) or lower their expectations, expenses and lifestyle. Younger people who mostly spends every rupee they can get their hand on are able to borrow money at lower rates to buy houses (and other consumer items) which kick-starts the economy generating jobs something that government wants.
With the recent uptick in government bond yields, interest rates on small saving schemes will be reset higher with a lag. but interest rates will remain low as long as inflation remains low and RBI will be under no pressure to raise rates. As long as interest rates are dropping, PEs will expand and remain elevated. Interest rates on some developed economies are in negative territory so there is really no limit to how low interest rates can go. In these countries, inflation rate is still positive which means real interest rates are negative as well which promotes consumption and asset bubbles.
Constant flow of money coming into stock markets from maturing FDs is keeping the market from falling a lot. 2017 has broken all records of volatility. the reason everyone thinks market is expensive is because there hasn’t been a major correction since demonetization more than a year ago. That’s why a correction is considered healthy as it flushes out effect of momentum and defines the short term fair value.
Yes that what i wanted to convey also. The money supply is real. The elevated PE are real for some time at least for 2-3 year (my bet). The corrections wont be harsh like 10% or PE coming to 20 or so, at best they can be mild (barring some black swan event).
While talking about intergenerational wealth transfer, we should look at real interest rates and not the nominal one. The real interest rate is meaningfully +ve in India after a long time. This is what Raghuram Rajan used to explain in his Dosa Economics illustration (misguided argument, in my opinion). I think that the real interest rates in India have been contrary to that in the US during the past decade. So, it is not clear to me that the government of India has been effecting an intergenerational wealth transfer.
Also, it does not look very probable that interest rates will decline in India or in the developed economies.
True. But real interest rate calculation is based on CPI, calculation of which is sketchy. IMO, CPI is understated so actual inflation is higher than headline number and actual real interest is lower than stated number.
Even if we assume real interest rates are +ve, they are trending lower and today’s real interest rates are much lower than what existed a decade ago and significantly lower than the levels before liberalization in 1991. High real interest rate is preventing investments (because that’s what borrowers pay and savers earn) which in turn limits growth. Government has identified this and is pushing RBI to lower rates. RBI is sticking to its inflation targeting policy for now.
Interest rates are actually ticking higher in India and Fed also likely to hike rates higher in 2018. So nominal rates have bottomed out in US and developed economies. Rates are just coming off near zero levels. but in India, real interests rates could continue to drop even if nominal rates rise (or stop falling).
My observation is US Fed was able to avert a real crisis from escalating into a depression by transferring wealth from savers to borrowers (and except for rich and financially savvy, no one even noticed it until it was too late). After looking at Fed’s success, Indian government appears to be taking a leaf out of Fed’s playbook to cause some similar wealth transfer to generate demand, jobs and boost GDP. Such wealth transfer is much easier and effective than subsidies and other redistribution programs.
You’re right - the options expired worthless. However, my stocks have done very well, and I have slept like a baby even with 100% long exposure to the market. Since September, I’m up nearly ~18%, including the capital lost on the hedges.
Risk means that more things can happen than will happen 
I have rolled over to the December '18 puts at a 10,000 strike for Rs. 204.
Two questions Yogesh
The existence of the thread has been modelled on data for 10 year period of 1999-2009.With current elevated levels and if it stays for a longer time frame(till around 2019), there would be a paradigm shift in base valuations especially since the last 8-9 years have not seen any real crash(like the dot com or 2008-2009)
Yes, if they have even lower interest rates. Foreigners also face exchange rate risk something that domestic investors do not face. There is a theory in economics called real interest rate parity which states that real interest rates around the world should be same over long periods of time. Of course there are some assumptions in this theory that do not always hold e.g. capital controls, taxes etc but what the theory says is if real interest rates are different between two countries then exchange rate between their currencies is expected to adjust to bridge the gap.
No. Interest rates are negative because there is more demand than supply of bonds thus bonds are priced higher than their par value thus rates are negative. Its bad for investors in those countries as they earn negative rates but good for developing countries as negative rates causes capital to flow to countries like India where real interest rates are higher (on a relative basis). Which means foreigners provide capital to fund our infrastructure which meets our funding gap as our savings are not enough to meet our investment demand (aka current account deficit).
