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

I’m with you on the same boat :joy:. There is still a lot of uncertainty and this is temporary rally IMHO. There are many reports saying that all that the lockdown does is get you some time to prepare. Once the lockdown is removed, we don’t know which way things will go. And as some wise people have said, when the pendulum swings back, it doesn’t stop at the middle.

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Isn’t this demonetisation 10x? Earlier I was on the same lines as yours but this now looks a coordinated recession across the world. In 2008 economic activity didn’t slow down but this looks like

demon (no cash) + 2008 (yet to come financial crises?) + economic activity stop.

As donald sir said better sleep well with cash and keep looking (following this strategy)

Only saving grace for will be apna India waala SUMMER.

Layoffs have started look at this news items:

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Yes Donald sir yourself are probably thinking on correct lines things could go from bad to worse.

To buy or not to Buy, Either way there is a risk, but which risk has more reward, is the real question.

For example HDFC Bank purchasing at 700 @PE17, what more could I ask for… A lower price? Well if I am targeting exit at rupees 3000 what does it matter if I enter at 500 for 700. In other words saving those 200 rupees is too high risk for letting go 2000 rupees of gains in the next 3 years.

A good friend recently insinuated that the people who try to time the markets are broadly unsuccessful because when the chips are down they are unable to execute the buying plans. A mindset that wants to buy lower will always find a reason to postpone buying in down markets. I am fighting to not be such. It would be a pity really.

PS: I am referring to myself and my tendencies, not a reference to anybody else.

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There was a moratorium on calling SME/Mudra loans as NPA till March 2020. This was done mainly because there was a severe slow down in economy last FY. Now I believe this moratorium is extended for six more months. Also NSSO survey clearly indicated that consumption has slowed down for the first time in 40 years. Even the food consumption in rural areas went down… That was already pretty alarming. This was before even virus emerged.

Coming to the present day and thinking after the virus issue. There is a lock down and we expect the lock down to be extended. There are clear indications that world economy may go in recession. So no one knows the magnitude of the problem we have at hand. Also no one knows the book value of the banks given the issues at hand.

looking at the number of new infections last days… it does look like we are following the pattern that other countries saw in the initial days. lets hope for the best. I do believe its time to invest in tranches at dips rather than buying at bulk if one can withstand the volatility. But reaching the old highs of nifty is far far away. My worst fear is that we may see the repeat of 2009-2014.

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While we are comparing this bear market to the one in 2008-09. Lets compare their peak to trough corrections.

Nifty 50

2008-2009
High 6357
Low 2252
Correction: 65 %

2019-20
High 12430
Low 7511
Correction: 40 %

2008 correction was brutal in comparison.

There might be more correction in store if one believes that this calamity has out-trumped the one in 2008.

One should be fully aware of the worst case while buying expensive stocks, especially midcaps. Where the growth has stopped but the valuations are high. They are highly likely to be washed out. I have some on my list, and I am scared :slight_smile:

Better to stick with well established names, and buying them in tranches. Once the storm settles will do the redistribution.

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Yup need to play it as it comes. After 2008 25% of companies lost it completely. Be careful while choosing stocks.

Yes bank was also a marquee name few years back … HDFC is marquee name today … only time will tell …

My hope is the indian summers … pra-chand garmi …

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Nifty PE in green after a really really long time. see April 2020

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Some information on NIFTY PE data and following rolling returns for 1/3/5 year periods. Table also has winning probability at certain PE ranges.

Table is representing the same data at different distribution ranges. Top table is at 10% distribution range, middle table ranges are taken from the work done by Deepak bhai. And the bottom table is looking at the data with more granularity of 5% distribution range.

Have expanded the work further to include NIFTY500 data as well as NIFTY50. Added 7/10 year rolling periods. Updated the blogpost link.

Blogpost: Building an Asset Allocation Framework – Part 2 | oldschoolfinance

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Timely and interesting analysis of Gold vs Sensex by venerable @pattu sir.

I sold my entire GoldBees holdings (from 2017) on Friday. Still holding onto my small SGB holdings.

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The sad truth is nifty today doesn’t represent the true state of broader market. It is more of a gimmick to attract investments from abroad. Small and midcap companies have been falling since 2018, yet nifty continued to soar. Even before this covid-19 fiasco, there was nothing much to cheer about the state of economy, many large cap companies were reporting abysmal growth in earnings yet their prices continued to rise and so did nifty. Hope, speculation and gimmicks without anything concrete is never sustainable in the long run.

My overall point is, there is nothing much to gain by learning these charts of nifty, as nifty doesn’t paint the true picture of markets today, forget painting the picture of economy. As such basing decisions to enter/sitout of market, buying/selling of companies by relying on these nifty charts can be very misleading. Instead focus should be on individual companies and their future prospects.

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Nifty is again getting over valued. Nifty PE is expanding. May be during March last week nifty levels were sensible but it has raced since then.

However, look at mid cap index, small. Cap index. They are at multi year low. With correction in prices and earnings growth over last 5 years, have reduced PE to attractive levels.

This opposite pattern means money is moving from small to large caps. May be safety, brand, size, survivability of large companies is weighing more than faster growth rate that smaller ones have.

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Please see this chart One is Gold Vs SPX and another is Pharm Vs Nifty

A post was merged into an existing topic: Question on Value Investing…Sanjay Bakshi’s Lecture

Deevee Sir… Can we get a quick update on where Nifty stands in regard to it’s current PE on the curve that your charts so well illustrate.

Tia

Hi

In this see saw Nifty went quite low in terms of Nifty reported PE. And it was a buying opportunity during that week. I personally did some purchasing as per my deployment plan. Have been in SIP mode in selective stocks thereafter.

Overall the PE hit a low of 25th %ile and hovered around 30%ile for a few days. A good period to buy I think. Has given 30% returns on index itself in 2.5 months. This period was lowest since end of 2014 I think.

Now we are back to median levels.

image

Rgds
Deepak

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Nifty P/E is now almost 28, nearly at levels it has peaked out in the past. And with Q1 results known to be bad, TTM EPS would fall and P/E would rise even more with no rise in the markets from the current levels.

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Nifty consol PE as per Bloomberg is 24. One has to account for cyclicality of earnings esp with covid related provisions, 8 days of no revenues for most companies in March.

One way of looking at it is to say in the next few quarters, a lot of companies would make losses which would drive PEs to very high numbers Aland hence due to this the market is overvalued.

But to my mind that would be an incorrect way of guaging market valuation as it is very unlikely that such kind of earnings continue in long term. Most probably in next 1-2 years, covid will be history and earnings will reach pre covid levels or higher.

Assuming pre covid exp Nifty Consol EPS was Rs 550 then a multiple of 20 gives a Nifty fair value of Rs 11,000 in next 2 years. That is the number I have had in mind for last few months. But Liquidity can drive multiples higher as we have seen in last few years.

icici-prudential-equity-valuation-index-july-2020-1-638

One can use this indicator published every month by ICICI Prudential Mutual Fund which is a combination of PE, PB and Market cap to GDP.

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Do we know why there is a discrepancy between Bloomberg as well as NSE data? Nifty shows the P/E ratio as 28 and Bloomberg shows it as being 24. I would tend to rely on NSE data more than bloomberg since NIFTY is an NSE index. I believe the difference is stark.
While one might be able to believe that one can invest at 24 P/E with some upside expected, it is difficult to make a case for investing at a trailing P/E of 28 (specially in index funds)! (I believe it does not include any Q1-2021 earnings).

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Regarding this…

Details from MOSL Bulls & Bears- India Valuations Handbook


Trailing P/E is high, but P/B and market cap-to-GDP is approaching Long Period Average

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Most us are worried about effect of Corona on our economy… But pre-covid numbers itself was worrying. Earnings growth of companies has been dismal. The spike that we can see in the plot in 2019 is due to corporate tax cuts and not due to earnings growth. A EPS delta of 35 was added for tax benefits.

To put things in perspective (or) how bad growth was

Dec 2014 NIFTY EPS 391 ( chosen because eps started sliding after that)
June 2020 NIFTY EPS 381 ( after corporate tax cuts )
June 2020 NIFTY EPS 346 ( subtracting the 35 delta due to corp. tax cut )

we are back to earnings level of 2013 and this is pre covid situation.

Another way of looking at would be to normalise the EPS growth and Nifty index ( I posted here before )

I think the EPS line acts as a mean reverter. Markets seems to take support around this line… At select points irrational exuberance seems to stop and mean reverts to the earnings. I don’t think it will be any different this time. Either earnings has to go up or market will revert to its fair valuation.

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