Background- Now days as nifty is making new highs, most of my friends usually tells me that market is going to crash similar to 2008 as valuations are too high(PE is above 28).
So my answer to all of them is, Market by its nature goes up & down but PE 28 is not the criteria of a bubble in market, market usually runs according to economic/business cycle.
so there will be a bust or not depend on which economic cycle we are in.
There are 5 Phases in a Economic cycle, which are as follow-
Stages of Economic cycle
1.Trough- The economy’s growth rate becomes lowest. There is further decline in demand and supply of goods and services until is reached to saturation point.This is the lowest it can go.
2.Recovery- Demand starts to pick up due to the lowest prices and consequently, supply starts reacting, too. The economy develops a positive attitude towards investment and employment and hence, production starts increasing. Employment also begins to rise and due to the accumulated cash balances with the bankers, lending also shows positive signals. In this phase, depreciated capital is replaced by producers, leading to new investment in the production process. Recovery continues until the economy returns to steady growth levels.
3.Expansion- There is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services.the velocity of the money supply is high, and investment is high. This process continues until economic conditions become favorable for expansion.
4.Peak- The economy then reaches a saturation point, or peak. The maximum limit of growth is attained. The economic indicators do not grow further and are at their highest. Prices are at their peak. This stage marks the reversal in the trend of economic growth.
5.Recession- The demand for goods and services starts declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All positive economic indicators such as income, output, wages, etc. consequently start to fall.
Now Analyse where are we-
so for analyzing the cycle we are in we need to check certain barometers for the economic growth, they are
-GDP
-GDP per capita
-Unemployment rate
-Inflation Rate
-Interest Rate
-Debt to GDP
-Industrial Production
if we look at all of these barometers, we see that all these are improving, GDP is going up YoY, Interest rates are coming down, Inflation under control, Debt to GDP is going down, Industrial Production is increasing, Demand is increasing etc.
So due to these we can conclude that we are neither in Through now in Recession. so now we are left with Peak,Recovery and Expansion.
we are also not at peak as all these parameters are just started to improve and stabilized.
So now as far as i understand we are in later stage of recovery and primary stage of Expansion.
due to Demonstration/GST, this cycle disturb for some time but now again of track, as confirmed by 8.2% GDP growth this quarter.
Now the Final Question Comes, where Equity Market is heading- we are still in Bull run and this bull run is not going to disturb soon, so no bust or crash is near in market, correction will come and go.
about the valuation comfort of PE 28+, yes it looks stretched but the type of Earning growth we will see in coming quarters, this Valuation will automatically cools off.
So Stay with Market and keep buying.
Link for Indian Economic Indicators-
tradingeconomics.com/india/indicators
So my answer to all of them is, Market by its nature goes up & down but PE 28 is not the criteria of a bubble in market, market usually runs according to economic/business cycle.
so there will be a bust or not depend on which economic cycle we are in.
There are 5 Phases in a Economic cycle, which are as follow-
Stages of Economic cycle
1.Trough- The economy’s growth rate becomes lowest. There is further decline in demand and supply of goods and services until is reached to saturation point.This is the lowest it can go.
2.Recovery- Demand starts to pick up due to the lowest prices and consequently, supply starts reacting, too. The economy develops a positive attitude towards investment and employment and hence, production starts increasing. Employment also begins to rise and due to the accumulated cash balances with the bankers, lending also shows positive signals. In this phase, depreciated capital is replaced by producers, leading to new investment in the production process. Recovery continues until the economy returns to steady growth levels.
3.Expansion- There is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services.the velocity of the money supply is high, and investment is high. This process continues until economic conditions become favorable for expansion.
4.Peak- The economy then reaches a saturation point, or peak. The maximum limit of growth is attained. The economic indicators do not grow further and are at their highest. Prices are at their peak. This stage marks the reversal in the trend of economic growth.
5.Recession- The demand for goods and services starts declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All positive economic indicators such as income, output, wages, etc. consequently start to fall.
Now Analyse where are we-
so for analyzing the cycle we are in we need to check certain barometers for the economic growth, they are
-GDP
-GDP per capita
-Unemployment rate
-Inflation Rate
-Interest Rate
-Debt to GDP
-Industrial Production
if we look at all of these barometers, we see that all these are improving, GDP is going up YoY, Interest rates are coming down, Inflation under control, Debt to GDP is going down, Industrial Production is increasing, Demand is increasing etc.
So due to these we can conclude that we are neither in Through now in Recession. so now we are left with Peak,Recovery and Expansion.
we are also not at peak as all these parameters are just started to improve and stabilized.
So now as far as i understand we are in later stage of recovery and primary stage of Expansion.
due to Demonstration/GST, this cycle disturb for some time but now again of track, as confirmed by 8.2% GDP growth this quarter.
Now the Final Question Comes, where Equity Market is heading- we are still in Bull run and this bull run is not going to disturb soon, so no bust or crash is near in market, correction will come and go.
about the valuation comfort of PE 28+, yes it looks stretched but the type of Earning growth we will see in coming quarters, this Valuation will automatically cools off.
So Stay with Market and keep buying.
Link for Indian Economic Indicators-
tradingeconomics.com/india/indicators