Current Outlook:
The market has been rising persistently ahead of earnings for over one and half years, and it is much overvalued. Nevertheless, bullish investors seem unconcerned. Historically, Nifty50 is considered to be undervalued if PE value is below 14, fair valued around 16-19, and Nifty is considered to be overvalued above 21/22. The current PE is 25.33 on 24-Aug 17 which is far above the overvalue side of the range. Since 1999 the average PE of NIFTY is 19.33 and the market tends to move towards its average whenever it’s get diverted far away from its average value.
After a close observation and analysis, I have found that, how dangerous it is to remain invested in an overvalued market. Since 1999, every time when Nifty PE exceeded 22, the average return over the subsequent 2-3 years became negative. As you can see the following historical PE data given below:
Month-year PE
Feb-2000 27.12
Feb-2001 21.32
Feb-2002 18.32
Feb-2003 14.32
Jan -2008 25.33
Jan-2009 12.73
Jan-2010 22.84
Jan-2011 22.81
The market trade in overvalued zone in the anticipation that Nifty comprising companies are going to report a very good set of earnings, and most of the time companies have failed to meet the expectations, which eventually led to steep correction and become a reason for negative return for next 2-3 years.
According to me, In a best case scenario, if earning growth are continue with the same pace through 2018, Q1 then the PE will come down to 21, but if price comprises Nifty50 stocks goes no higher further otherwise overvaluation will continue to be a problem.
Note:
Since late 1999 there has been a persistent tendency toward overvaluation and below the undervalued side of the range. However, the market can stay overvalued for years, hence market valuation is not a timing tool, but it should be a consideration when taking investment decisions. Currently, valuation is unfavorable.
Stay Alert….! Be a savvy Investor…!!
Pankaj