Understanding High Nifty P/E

 


Nifty50 index closed at 17,999.20 on 16th November 2021 and even after it is dropped more than 600 pts from high, the Price to earning ratio is still at 24.83. This means buyers of nifty50 companies or index traders are ready to pay 24.83 multiple prices of their(Nifty 50 index constituents) earnings to buy the stocks or contracts.

According to past events Nifty P/E considered being scary at these levels but how have situations changed for the Indian index this time?

First, let's understand why and how the value of stocks increases!
My Understanding- 
When an investor is generating X amount of returns but then with the passage of time high liquidity kept the price of equity higher and bond yield decrease, then the investor has to take more risk to generate the same returns and more returns to balance out lower yield returns and slow growth of their safe-haven assets after so much of inflation in the assets and that can be done by investing the amount into the higher risk assets for higher reward. Which leads to increases in the value of stocks.

Factors that are keeping the valuations of Indian markets high...
  1. Earnings growth opportunity of Indian companies.
  2. The influx of money flow from new investors after the Covid-19 sell-off.
  3. High Liquidity support from Government institutions from the Covid outbreak maybe it will continue till the end of it.
  4. Low bond yields(5-year bond yield is closed at 5.82% on 16th Nov 21) force investors to opt for riskier assets to keep beating inflation, benchmark, and generating more returns for growth.
  5. Growth opportunity in the markets attracts Domestic as well as foreign investors to take advantage of the opportunity and make higher returns.
Will it stay this high ever?
No, at this time we are in the phase of a high-growth developing nation and this it's a big psychological viewpoint that attracts foreign funds. Once the liquidity inflow slows down and as RBI continuously buys bonds to keep the price stable and when it will start increase Equities usually correct in price or time. But can we again go towards 4 digits Nifty50 in this or upcoming next year, I personally don't think so because it looks very difficult with this high liquidity in the market!

What a trader or investor should do at these valuations?
As per my understanding, traders don't need to worry about valuations, they ride the trends and make money from swings of the markets and for my dear investors, any large lumpsum investments should not be done with the expectation of extraordinary returns at this valuation. Good fundamental stocks can mostly generate alpha in the long run if we keep buying them after retracements. With the systematic investment process, we always can accumulate all the prices of markets, no worries to SIP holders.

But whoever you are in this whole market and whatever you do, Enjoy the process and the journey. In long run, we learn the process and in the coming years and decades, we will get lots of opportunities to generate returns. Keep the learning process always on and Very good luck from my side with the best future ahead.

- Sahil Saini

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