Thanks @Lynch. I think Simple Average should give similar results as the Median. If one wants to understand purely the macro story, Weighted Average can be used. That would tell what is happening in the outside world. But for a stock picker’s purpose, it would bring the same distortion that size brings into indices. For example, TCS is around 90 times bigger than Tata Elxsi. One bad performance from TCS may nullify 9 other Tata Exlsis who have done well (or vice versa). What may be more important for the stock picker is to know that 9 out of 10 companies have done well. Thus, what metric to use depends on the purpose for which one is using that information.
I haven’t done mean analysis, I will put it up here if I do it.
Thanks this is great insight, this means markets will perpetually keep on going big, given that from the budget India has ignored fiscal deficit and printing more money. I think 3 sectors which are super critical and drive NIFTY are going to be IT(Including New start ups), Pharma and Green Energy (renewables) … does it makes sense to go big on stocks in these sectors ? Also the impact of Crypto currency will the world move to Crypto considering it has a clearer trail and we just can’t print it… thoughts ?
Hi @gemms1985,
I’m glad that you liked my thoughts,
Let me clarify that I was not specifically talking about Sensex/ Nifty but about broader markets,
Many of the Nifty stocks are overvalued and I do expect them to go up but not to give very good results in terms or price appreciation in next 1/2 years, I would also like to disclose that I do not hold any of Nifty stocks in my portfolio and I’m a bottom up stock picker, usually look for businesses having some kind of competitive advantage or lowest cost producer and run by capable management, doing things differently than peers and prices trading at large discount to its underlying intrinsic value. So for me it doesn’t matter in which sector or industry business belongs to.
Source : Sage one memo, Samit Vartak (also attaching full memo for your reference)
A deleveraging cycle is played out in economy, and if RBI keep interest rates low for next 1.5/2 years, definitely economic upcycle is going to play out,
I’m now invested in most cyclicals where I think strong companies can increase market share with each cycle and have strong balance sheets, available at attractive prices etc.
On crypto’s, I like old school central bank currency and world currency market system, neither bullish nor bearish and don’t understand crypto’s, so no views.
Have similar thoughts, I also believe that while there are pockets in Indian markets where there is some bit of overvaluation, in a broader sense, Indian markets may not be as overvalued as US stocks (esp Tech).
Nifty stocks are also overvalued mostly cause of the huge FII inflows coming in since June last year.
However, there is a very significant risk of US markets correcting and that leading to some bit of turbulence around the world markets including India. Our markets are very much dependent on FII inflows and a sudden exodus of money from them will definitely lead to some bit of correction in Nifty and broader names as well.
You are right, and such 10-15% corrections we can always expect in a bull market.
but in a long run all the data suggesting positive trend for Indian markets, these are all our wild guesses and nobody knows exactly how the future is going to unfold.
Indian economy is in long term growth phase and a unknown bad scenario can delay growth by not more than 3-4 qtrs,
So the plan is to invest in solid businesses at attractive prices, never use leverage for building portfolio & ignore the macros and just wait and watch. ( Time is a friend of good businesses and enemy of mediocre )
For all the talk about valuations, the focus on earnings growth potential is missing. So despite all upgrades, it appears that consensus estimates are conservative. If earnings were to go back to 4% of GDP from 1.8% seen in FY20, we are looking at possibly Rs900 EPS for FY23 for Nifty 50 and suddenly market looks cheap
Source:-20% to +20%, Didn't expect this!
you mean to say Nifty earnings will double in Next 3 years? Analysts have been giving target of 600 EPS for last 6 years and we are struck at 450. That translates into Cagr of 26%. If we indeed reach 900 then we are looking at a forward PE of 17. I do feel it is extremely optimistic expectation. Let’s not forget all that money printed in the name of Covid will have some impact (10Y bond yields of US treasury already raising and gone up 65% in last 3 months) and then come the next year govt will shift focus towards doles for the upcoming 2024 elections.
Can earnings growth be sustained? As a result of covid many companies went into cost cutting mode which improved bottom line which is clearly getting reflected in the quarterly reports of many companies while top line is declining. I guess one covid over any companies many not be able to carry forward similar cost cuts be it benefits, renumeration etc… But let’s see if EPS indeed doubles. It crude price goes any further than this then we will hit double digit inflation soon that’s one more factor to consider. Markets in short term never follow earnings. For eg : From 2010 to 2013 nifty earnings improved steadily but market moved no where because of double digit inflation in India while from 2014-2020 Nifty EPS moved no where but market is almost tripled why? Low interest rates, low inflation, High liquidity and stable govt.
Most investors/analysts including me are stuck with reference points. My view is that Indian economy and as a consequence Indian businesses were suffering from demonetisation, GST implement and and now Covid for last 3-4years. So you have a low base of last 4years to catch up on revenue growth and earnings. The loose monetary policy, fiscal support, financial incentives like PLI and finally recovery in global growth are great factors for this upward correction in earnings to happen. The probability is very high and market is likely to discount it unless proved otherwise.
But how sure are we that the effects of these so called policies are weaning off? In any case even small caps can’t double in a span of 3 years and we are talking of companies with current sales of 595,887 cr and equivalent companies to double their sales ( of course earnings can be improved by other means which is not sustainable) with in a span of 3 years?
Let’s not forget geo political events, inflation, crude prices and taxes. Let’s not forget Corona is still around and we don’t know when we can get rid off it fully. As long as Fed keeps pumping in money nothing matters. No one can stop Nifty, S&P 500 with or without earnings it knows only one direction. When Fed reverses policy then also nothing matters and it knows only one direction but why would Fed reverse direction when it is working wonderfully for last 10 years? I really don’t know but all i know is everything has an end. when and how , I don’t know either. It all takes someone to pull the string and say enough is enough. It maybe US citizens themselves Or Chinese Or Japanese who hold humungous US treasury bonds which are getting devalued every passing year.
Just so you know Indian market is not about just India alone but it is largely dependent on US Fed and its actions. So far they have been printing trillions of dollars year after year to support stock market and tried reversing in 2018 which triggered off 20% drop in market.
If you are trader it is a great time there is hardly any signs of crash but if you are investor specially long term investors then let’s see where we are today. Nifty PE 40, Mcap/GDP > 100% which are nothing but expensive valuations. With earnings yield of just 2.5% and let’s consider long term growth rates of India inc comes around 7% (Current optimistic GDP growth rate) then we are looking at 9.5% returns , considering you reinvest dividends else the returns are much less. If anyone is happy with such returns it is definitely right time to invest.
Let’s say we invest at these levels and market goes no where (which is very much possible just look at S&P 500) then only thing you get back is dividends and India Inc cleverly in the name of growth paying dividends with yields of less than 1% and that’s the only return you get during the periods of stagnation in the markets.
So essentially when you invest when stocks are cheap you get higher dividend yield and higher earnings yield (if PE is 10 then you have yield of 10% which is a great return to start with) which for long term investor is the best risk premium.
Lokeshji you make lots of valid observations. All the risks you highlight can play out. But the probability of these playing out over next 1year are very low. For FY22, the GDP growth being projected is 11-12% and add to that inflation which is 5% or so. We are looking at nominal GDP growth of 16-17%. If industry leaders do well they can easily grow their earnings by 25-30% in this kind of economic backdrop. This is what market is looking to discount currently.
Nifty valuation to become 12% cheaper from March 31.
NSE to consider consolidated earnings to calculate PE ratio.
Derive your own conclusion on why NSE is doing this now, at a time when nifty PE is 40.
Also note where Nifty valuation is vis-a-vis other markets across the world.
“Also, the imminent drop in Nifty 50’s P/E ratio valuation does not make the index cheaper globally. Even at 35 times trailing 12-months earnings, the Nifty 50 index will continue to be one of the most expensive globally. For instance, China’s SSE Composite trades at 19 times, America’s Dow Jones Industrial Average trades at 28 times, and Japan’s Nikkei 225 trades at 34 times.”
All Forum which I have visibility everyone is talking about “W” shaped recovery - hence we should see one more jolt coming through and then markets will rise again, also earnings will released for quarter Jan - Mar and we should definitely see some effect on the banks, since moratorium is going to end and recent supreme court ruling about interest on interest, this month is going to be interesting …
Looking at the past quarters we are bound to see some more correction, considering the markets really climbed up after budget 2021
The only thing which is driving world market is liquidity. There is never in the history people were waiting so eagerly for the FED meetings. In the past people never bothered to know who is the actual FED chairman but now everyone is very much tuned for his updates. As long as Jerome powell keeps printing money and purchases assets then valuations don’t matter at all. Many Americans and Europeans wants to diversify their investments (Into other currencies) due to fears of hyperinflation and currency devaluation. As long as Fed keeps pumping money into markets along with sub zero interest rates then world markets will go high and high. On top they are making sure bond yields stay as low as possible. Interesting times let’s see where it all ends.
Another great explanation by Prof. Damodaran on Interest Rates and Market Returns and what actually drives interest rates.
Quote from the video:
‘If you see the economic growth as front page news, equity will go up irrespective of the rise in interest rates and if you see inflation being the front page news, equity will go down irrespective of where the growth rates are’.
He also shows, interest rates are made up of two parts (real growth rate + inflation rate) and why the interest rate has been so low over the years. Why the Fed cannot do much about rates and how markets are painting a very rosy picture (at current levels).
I have seen a very common behavior after reading so many things (not just books) and hearing many talks and watching videos. “When people start calling warren buffet dumb, well we are in a bubble”.
Buffet missed Internet stock, He is Dumb!.
Buffet Sold Airlines, He is Dumb!.
A 20s guy calls 90s (age or era) old man Dumb…& many believes it.
For those who are experiencing FOMO, please do watch it:
For Full (My Favorite):
From The Five Rules for Successful Stock Investing Book by Pat Dorsey
I realized this some years ago while attending the annual meeting of Berkshire Hathaway, the firm run by billionaire superinvestor Warren Buffett. I overheard another attendee complain that he wouldn’t be attending another Berkshire meeting because “Buffett says the same thing every year.” To me, that’s the whole point of having an investment philosophy and sticking to it. If you do your homework, stay patient, and insulate yourself from popular opinion, you’re likely to do well. It’s when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you’re likely to get into trouble
Nifty P/E is now being calculated using consolidated earnings vs standalone earnings earlier.
This is the correct practice now and a much more accurate data point of Nifty’s earnings. But Covid has shrouded the true Nifty earnings, otherwise actual Nifty P/E may have been in the vicinity of 25x.
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