Nifty PE crosses 24|A statistically informed entry-exit model!


#1383

I don’t understand the need to disparage this thread. Different personalities, different methods. From your posts in other threads, I can see you are still learning (like the rest of us). Learners cannot be dissers.

Your trading calls and use of technical charts (posted in other threads) is not our cup of tea (at least for some of us). Like @valuestudent said, some of us invest huge amount of savings to grow the money, not trying to get rich. We don’t need lotteries, we need opportunities where risk-reward ratio favours us. We are waiting for that big fat pitch, irrespective of whether it comes next month or next year.

You talk about risk very flippantly. If you don’t understand risk, all the understanding about the individual businesses & macros won’t help you in the long run. That makes this thread the most important one on VP. Please re-read Howard Marks’ “The Most Important Thing” again. I leave you with a couple of quotes from ace investors Buffett and Munger.

“The stock market is a no-called-strike game. You don’t have to swing at everything --you can wait for your pitch…Ted Williams described in his book, ‘The Science of Hitting,’ that the most important thing - for a hitter - is to wait for the right pitch. And that’s exactly the philosophy I have about investing - wait for the right pitch, and wait for the right deal. And it will come… It’s the key to investing.” — Warren Buffett

The big money is not in the buying and selling, but in the waiting. — Charlie Munger


(Tushar) #1384

Coming back to the discussion over valuations, this year PE has touched 28 twice, once in Jan (Nearly) and other in Aug.

  1. Why is there no crash like 2000 or 2008?
  2. How can Nifty PE sustain above 24 for 6 consecutive quarters without big fall or correction? That’s too long time for overvaluation. Like we repent not investing in long undervalued markets, will we repent not selling everything during this long overvalued market?
  3. If even every retail investor know that next is 9600 to 8500 on Nifty, how is it sustaining at this level? Every person I talk to tells me its going down now. No retail investor knew about fall in 2000 or 2008. In March 2008, we were still hoping for turn around. By Oct 2008, few people I know booked losses only to find that was the bottom later. Is retail investor really this smart now? Is that possible?
  4. What are we missing that big fund houses and big individuals know?
  5. Is Nifty composition the main difference here? In 2008, Banking and Financials were 20% and Oil/Energy was 25%. Now Banks and Finance is 35% and all energy 15%. Have we ever valued financials based on PE? The PB value is still in green zone although PE and Dividend Yield is in Red. Out of these 2, Dividend yield is bound to go lower than historic levels as it is getting replaced with buybacks due to taxes.

(Divyanshu Bagga) #1385

PE ratio is not a market timing tool, and our use of it like one is flawed. PE ratio gives the measure of the potential of our investments, but without knowing the direction of momentum, we dont know whether that potential will decrease, or increase even further. If you are trying to time the market, you should use the tools meant for it - Like to 200 day SMA i suggested above, or any other technical indicator. Thoughts? @jamit05 @valuestudent

Well I wasn’t in the 2000 or 2008 market, so can’t comment about them. But one thing I feel certain about is the control of money by bulls after the prolonged bull run. Think about it. We have a decade where bullish strategies outperformed the bearish one, and most of the fund money is allocated on the basis of outperformance. Those strategies are geared towards buying every dip. While you may know many who are bearish, how many of them are expressing their view in the market? So a change to bear market is going to be very slow, but once it happens, the movement will be huge.

We should not try to invest like fund houses. They have many constraints. For example, they are forced buyers, they have to invest the money coming in, according to their schemes, even if there are no good opportunities. Conversely, in a bear market, they become forced sellers when the money goes out. A smart individual managing relatively small amount can very easily outperform them.


(Varun) #1386

i feel overall market optimism determines how effective this signal is. If the PE is 24 will all kind of stocks firing, it is a signal that one should be conscious… where as with many stocks trading at their 52 week lows and major money invested is only in good quality stocks. Why will quality fall 30-40% if their is growth behind them?? Major reasons are margin calls, redemption pressures & fall in growth.

Also, due to bank cleanup axis bank / icici bank / sbi have almost nil profits or major losses. If we think this is the end of clean up and expect to add their reasonable earning 1-2 years hence, the PE ratios will reduce substantially… I think this major bump in earnings part which should happen in 1-2 years should not be ignored…

i feel these are the major reasons that market is sustaining such a high PE (historical pe) for so long.


(Amit Jain) #1387

Permit me to join the discussion.

In recent times it has been a game of liquidity. In the wake of Lehman Crisis, the US government realized that they must intervene in a big way. Therefore, throughout this decade FED was dovish on the rates, which opened the flood gates for the economies world over. Especially the emerging ones. India being one, got its share of attention. “Free” money got printed in droves which was meant for economic development, but most of it found its way into the stock markets. Which is why we are seeing Nifty PE reaching dizzy heights, and sustaining.

The performance of last ten years has had a debilitating effect on the retail investors psyche. There is a huge section of the society that now believes that the only way the market CAN GO is UP, because that is all they have ever seen. There are others too, with a memory of pre-2010, but that is too much in the past, or they might have not been affected by it. For sake of consensus, of all the people in VP how many were affected by 2008 crisis enough to have the experience etched in their memories. My guess is, very few. The ones with a strong memory of 2008, will not participate at such levels.

In summary, there is a large chunk of retail investors who are feeling the rush of investing, as they believe that investing is a bed of roses. There are a couple of new portfolios starting on VP everyday!

But, I believe, the tides have now turned. Lately, FED has been hawkish. In last four sessions it has increased the rates, including the once this month. Due to which Dow Jones, SP, Nasdaq have all nicely corrected, and according to gyani people, have entered into a bearish territory. Our homegrown Nifty is also following suit.

So, what lies ahead?

Currently, sentiment is good (the business is not). Therefore, at every correction there will be buying. People are okay with high PEs as they have thrown caution to the winds. Blame it on the recency bias or need for more experience. India is going to have general elections next year, therefore it is unlikely that the powers-that-may-be will let the market fall. In fact, it makes sense for them to drive it to fresh highs. It is the best trap ever. Nothing drags the side-liners right into the middle of the game better than a stiff dose of the good 'ol FOMO. That is two birds with one stone: Purporting good sentiment pre-election and finding “greater fool”


#1390

2000 and 2008 were different crash. In 2000 only tech was insanely valued but others were under valued. 2008 most of sectors went up and was a financial meltdown.


(777) #1391

I believe that 2000, 2008 and coming crisis are all related although we may see them differently and blame on different issues. The fact is that during 80’s US started rasing debt and easy money policy more aggressively which resulted in huge growth and easy money. This easy money led to bad assets which was triggered by IT boom , but that was where(IT) this easy money found place. This got corrected and we saw a boom again from 2003 onwards. US however kept the easy money policy and which led to 2008 and this time it was because of bad assets created in form of real estate. Policy makers had no easy fix for this, so they threw even more easy money during 2009 and Feb balance sheet grew from 1T $ to 5T$ with interest rates dropping to 0 from 5% (pre 2007 era). This liquidity now in the past 10 years came to share market and all markets around teh world are up without business fundamentals improving. Policy makers where hoping that liquidity will improve share markets which in turn will let to business revival.

In Short to my understanding easy money formed bubble in form of IT shares (2000), real esate (2008), and overall stock markets (2018).

Now when fed is rasing rates, it signals that they are preparing for upcoming slowdown cycle. They are sucking liquidity and raising rates at the same time. Markets will hold on until very last of the investors sitting on sidelines buy this dip and then I feel there would be major rerating of markets. Its a test of patience and conviction.


(AM648) #1392

Interesting discussions.

I see a lot of people talking about how near zero interest rates is a “this time is different” scenario. Obviously there is not much history on this scale of QE but there have been period when interest rates have been so low in the past and I tried to study the period immediately after it.

I tried to study a few data points over the last 100 years in the US economy. I put particular emphasis on the period between 1966 and 1982. This period gave little on no returns for a period of 17 years (if you exclude dividends of 4.1%). Some striking similarities between 1966 and now.

  1. Interest rates were close of 3.5 percent on its way up
  2. Unemployment levels were at record lows
  3. Market PE was above 20
  4. Nifty fifty bubble of high quality stocks formed in early 70’s
  5. Inflation was under 4 percent

For the next 17 years, the Fed kept raising rates as it tried to control the effect of high wage growth and inflation which was a result of low interest rates in the previous years. By 1981 PEs contracted to the point where they reached single digits. The lowest point was a PE of 7 after which a bull phase started again.

With QT having started, PEs being in the high teens (corrected from 20s), interest rates on the rise, is US likely to see a period of long flat growth in stocks. Will India also have a rub off effect given how deeply intertwined global markets are?

Another data point is the flattening yield curve in the US. Typically this has a strong correlation with recessions or near term slow downs.

So:

  1. Case 1 - US economy keeps firing and and fed engages in QT and rate hikes making liquidity tighter and putting pressure on global equities
  2. Case 2 - economy slows or worst case there is a recession in US and there is a flight of capital.

Either case scenarios are not encouraging.

Views invited.


(777) #1393

Great point Abhishek,

I also had a look at period from 1966 to 1983. However most of the data looking same there is a major difference. US Debt levels. US debt to GDP was very low in the beginning of 1980’s and the boom which stared in 1980’s was a result of raising debt levels. It was raised from 30% to 50%, the 50 to 70% and obama did from 70% to 90% and now current administration raised it further to 110% of GDP. In 1983 they had the room to raise debt and that’s now longer an option. In the past US found their way out by printing $. The appetite was $ is no longer there. last 5 years all the major central banks have been reducing US $ reserves and selling bonds. Who will buy US debt now. As of now , it only Saudi buying US debt. But they alone cant sustain the inflow, Allan greenspan (US feb chairman from 1986 to 2006) recently spoke about US heading to Stagflation and his suggestion was, I am just quoting “Markets may go up further, but when they do run.” It looks like this might be atleast a decade long slowdown for US, not to suggest that it would be same for emerging markets, but surely everyone would feel the pain during this churning.


(AM648) #1395

In order to avoid the effect of confirmation bias - one should try to find data in which where there is a sustained period of high PE ratios together with growth continuing for several years!


#1396

1929 and 2008 are part of long term cycle/economic cycle whereas 2000 is more about a sector boom/bust. That is my understanding based on some reading.


(777) #1397

There are different data points which tell that 2000 was’nt only IT related.

Here are couple of data points. Look closely every recession was cause because of interest rates being too low for too long. same was the case here They started raising rates, but it was too late.

Every recession was preceded with low unemployment rates (Just not It related unemployment), same was the case with 2000. There are other data points as well if one digs in more.


#1400

Sharing a post on H&S pattern from VP.

Inspite of overvaluation, deluge of news on global slowdown, US markets in bear category, India political uncertainty, somehow Nifty PE is holding over 25 level. This is quite counter intuitive and frustrating for buyers with cash waiting for a significant correction.

Let’s watch out for earnings recovery in Jan and April. May be market excepts a double digit growth in EPS YoY.


(Amit Jain) #1401

Let the General Election get over. Until then every incumbent government will prop the market. I do not expect to see correction months before voting.

BJP will do all in its power to gather their scattered sheep; and sheep they will gather.


(777) #1402

Within the next few months I feel we are going to see a rally where all concerns like trade war , elections etc would vaporize. People sitting on sidelines would start participating and that would signal start of major downward Rerating.

@ppk123, everyone who have gone through 2008 crash understand what taking away excess liquidity means. India has great fundmental long term story and that India story didn’t change from Jan 2008 to Oct 2008 yet market came down from 20000 sensex to 8000 sensex. That’s what liquidity can do. More recently on a smaller scale 2017 small caps moved up 50% and 2018 are down 30% , that’s a function of liquidity too. Did that change India story in any way? I don’t think so.


(1.5cr) #1403

Nifty earnings CAGR of 18.5% in FY18-20E

The last four quarters have been phenomenal for the oil & gas as well as metals space primarily driven by an increase in commodity price globally with consequent higher double digit topline as well as bottomline growth. However, we would highlight that ex-commodity space; topline and PAT growth at Sensex companies (ex-banks) has also been encouraging, specifically in the capital goods, FMCG space and lately in the IT pack. This depicts more structural legs to the earnings recovery, which is broad based and has the potential to sustain, going forward.

We expect the Nifty to witness a healthy 18.5% earnings CAGR in FY18-20E. Earnings growth will be led by index heavy banking & NBFC space amid resolution of stressed assets and supported by defensives sectors.

Valuing Nifty at 19x FY20E EPS to arrive at fair value of 12100

Indian markets look undervalued vs. their global counterparts as currently we are in the midst of strong a corporate earnings recovery primarily led by improving asset quality in the banking & NBFC space. In other markets, earnings growth looks muted or faces uncertainties like Brexit (UK). Domestically, our two year earnings CAGR is pegged at 18.5% with consequent PEG ratio at 0.9x vs. global average of 1.8x.

Our long term (14 years), across cycles, one year forward P/E multiple works out to 15.2x with corresponding standard deviation placed at 2.6x.With average + 2 standard deviation placed at 20.3x (cap) we are comfortably placed in valuing the Nifty at 19.0x, which is ~average + 1.5 standard deviation. Therefore, we, assign a P/E multiple of 19.0x on FY20E EPS of Rs 636, to arrive at a fair value of 12,100 for the Nifty.

*copy paste from a blog.


#1405

(777) #1406

Useless article. He only says one thing that stocks bounce back after they decline. Yes , they may bounce we agree, but can they sustain higher level? I don’t think so. Of course If fed is able to raise interest rates without causing a recession they could. But that would be first time ever. We would also have to assume that during all these years of free money , there were no bad assets created.

That being said , possibility of markets going higher is always there. If that happens in my opinion, we would be on the final leg of this liquidity driven market and would be interesting to see how it unfolds.


#1407

He manages > 100B $ and author of multiple best sellers. I will leave it at that…

Happy New Year


(777) #1408

Happy new Year :slight_smile: Normally I don’t go just by what these guys say in media unless they present some facts, so many times these guys would come in media say something and do opposite. He didnt gave any reasons in the article , that what I wanted to point out.