The earnings that we generally expect to grow by 14-15% every year, assuming the real growth of GDP to be 8% and inflation to be 6%.
In the last 4-5 yrs the GDP growth has disappointed. That does not mean we believe the growth rate expected in future should be lowered, we still believe based on RBI and govt comments that India is a country where to employ the large number of people that join the workforce every year, we need 8% real GDP growth and to achieve that three forces would work,
1) the industrialist themselves
2) RBI might help by lowering interest rates or use other ways to increase economic activity if the industrialist themselves cannot increase their earnings.
3) finally the govt by giving fiscal stimulus which can come from n number of ways.
The nifty value on 29th June was 5278 and the PE ratio was 17.51. I hope the people who completed the course more than year ago remember:-
That Price = Earning * PE ratio
Rearranging the same equation:- Earning = Price / PE ratio . i.e. Earning = (5278/17.51) = 301
Today when the Nifty is trading at 10234 and Pe ratio is 26.52
Earnings today are (10234/26.52)= 385
If you calculate the growth in earnings, CAGR 4.76%.
So you understand the growth in Nifty is mostly because of increase in PE from 17.51 to 26.52.
Now the million Dollar question Should we sell today, considering your CAGR including dividends would be close to 16%.
1) No doubt the PE is high, (But earlier the safest option you had was bank rate of say 8%. So P/E for a bank FD would be 100/8 = 12.5, to earn 1 rs in the bank you had to invest 12.5 rs. Today the bank rate is 6.5%, i.e. the P/E for bank FD is 100/6.5 = 15.4, to earn 1 rs in bank you need to invest 15.4 rs)
Remember Warren says Interest rate is to the stock market what gravity is to objects on the planet. If the gravity is low, objects move up and if gravity is high, the objects go down. Similarly as interest rates go down the premium we pay for the markets go higher. So the PE of 27 which was considered to be high earlier, is though high but cannot be compared to 27 when interest rates were 8%. Note I have not considered tax to be paid on interest in both cases. But all said no doubt the markets are not horribly cheap as of now.
2) Big IPOs are being able to raise money. I think the biggest IPO of this season is GIC around INR 12000 crores. Still smaller to Coal India INR 15000 crores and very small considering the GDP size would have more than double in 7 yrs. Also the over subscription is nothing as compare to Coal India or R power IPO. So we are looking for a very big IPO also where the retail participation shows euphoria in terms of over subscription. But no doubt the IPO market is slightly euphoric.
3) One very important indicator is we are finding it easy to enrol people for the course, Now we are present in Delhi, Ludhiana and most probably will start a Program in Kolkata.
4) The only silver lining is extremely low earning growth. The earnings growth which is horribly low, if earnings start to increase, even if PE ratio does not increase, markets can go higher.
5) MCAP to GDP ratio is also not horribly high.
So we are not selling, though if the earnings don’t come in next few quarters the sentiment might get hurt which might take the price lower. But we cannot predict such peaks and bottoms. Like the 2015 Jan – March was also a small peak. When I look back today , I definitely feel, it would have been great to sell at that peak and buy again later, but that’s our limitation , we don’t try to predict such moments, we only act when its very clear, for us it would be clear only when P/E and earning growth rate both would be high.
Remember Lord Warren Says “In stock Market Rear view mirror is always clearer than the windscreen”
But yes, anything that you require in next 5 yrs should not be in the stock market, not because of the levels of market today but because in the short term markets will always be unpredictable.
In the last 4-5 yrs the GDP growth has disappointed. That does not mean we believe the growth rate expected in future should be lowered, we still believe based on RBI and govt comments that India is a country where to employ the large number of people that join the workforce every year, we need 8% real GDP growth and to achieve that three forces would work,
1) the industrialist themselves
2) RBI might help by lowering interest rates or use other ways to increase economic activity if the industrialist themselves cannot increase their earnings.
3) finally the govt by giving fiscal stimulus which can come from n number of ways.
The nifty value on 29th June was 5278 and the PE ratio was 17.51. I hope the people who completed the course more than year ago remember:-
That Price = Earning * PE ratio
Rearranging the same equation:- Earning = Price / PE ratio . i.e. Earning = (5278/17.51) = 301
Today when the Nifty is trading at 10234 and Pe ratio is 26.52
Earnings today are (10234/26.52)= 385
If you calculate the growth in earnings, CAGR 4.76%.
So you understand the growth in Nifty is mostly because of increase in PE from 17.51 to 26.52.
Now the million Dollar question Should we sell today, considering your CAGR including dividends would be close to 16%.
1) No doubt the PE is high, (But earlier the safest option you had was bank rate of say 8%. So P/E for a bank FD would be 100/8 = 12.5, to earn 1 rs in the bank you had to invest 12.5 rs. Today the bank rate is 6.5%, i.e. the P/E for bank FD is 100/6.5 = 15.4, to earn 1 rs in bank you need to invest 15.4 rs)
Remember Warren says Interest rate is to the stock market what gravity is to objects on the planet. If the gravity is low, objects move up and if gravity is high, the objects go down. Similarly as interest rates go down the premium we pay for the markets go higher. So the PE of 27 which was considered to be high earlier, is though high but cannot be compared to 27 when interest rates were 8%. Note I have not considered tax to be paid on interest in both cases. But all said no doubt the markets are not horribly cheap as of now.
2) Big IPOs are being able to raise money. I think the biggest IPO of this season is GIC around INR 12000 crores. Still smaller to Coal India INR 15000 crores and very small considering the GDP size would have more than double in 7 yrs. Also the over subscription is nothing as compare to Coal India or R power IPO. So we are looking for a very big IPO also where the retail participation shows euphoria in terms of over subscription. But no doubt the IPO market is slightly euphoric.
3) One very important indicator is we are finding it easy to enrol people for the course, Now we are present in Delhi, Ludhiana and most probably will start a Program in Kolkata.
4) The only silver lining is extremely low earning growth. The earnings growth which is horribly low, if earnings start to increase, even if PE ratio does not increase, markets can go higher.
5) MCAP to GDP ratio is also not horribly high.
So we are not selling, though if the earnings don’t come in next few quarters the sentiment might get hurt which might take the price lower. But we cannot predict such peaks and bottoms. Like the 2015 Jan – March was also a small peak. When I look back today , I definitely feel, it would have been great to sell at that peak and buy again later, but that’s our limitation , we don’t try to predict such moments, we only act when its very clear, for us it would be clear only when P/E and earning growth rate both would be high.
Remember Lord Warren Says “In stock Market Rear view mirror is always clearer than the windscreen”
But yes, anything that you require in next 5 yrs should not be in the stock market, not because of the levels of market today but because in the short term markets will always be unpredictable.
Comment:
like said in this post alone pe can be misleading to judge market.
2 months and index exactly up by 10%
KA