P/E Ratio Analysis of Nifty – February 2016 Update

Note – I have updated this analysis in 2017 here.

I had been working to make this analysis more useful. Like all previous updates, this one too has index (Nifty 50) analysis of 3, 5, and 7 years. But this time, I have also added an analysis of 10-year returns. Since most readers of Stable Investor are interested in long term investing, it made sense to add an analysis for a longer tenure.

In addition to that, I have also incorporated few more tracking points to give a more comprehensive P/E based picture. The details will become evident as you go through this analysis.

In case you are interested in reading previous years’ analysis, then you can access them here: 2012, 2013, 2014 and 2015. (The latest summaries are available in tab named State of Market)

So what exactly is that this analysis tells?

To put it simply, it tells that it makes sense to invest (if possible, more) when general indices are trading at lower PEs. This statement is based on last 17 years’ worth of analysis.

But mind you, there is ofcourse no guarantee that the trends might continue in future.

So this analysis tells about the possible returns one can get when the money is invested (in index) at various PE ratios.

Let’s go ahead with the updated findings…

Nifty PE Analysis 2016

The table above clearly shows that if one is investing in markets where PE<12, the average returns over the next 3, 5, 7 and 10 year periods are astonishing 39%, 29%, 23% and 19% respectively. Now this is something remarkable. The money is doubling every 2-4 years.

On the other hand are PE ratios above 24. These are levels that are considered to be highly overvalued, in market terms. And returns on money invested at these levels, for the next 3, 5, 7 and 10-years are (-)5%, 3.4%, 9.6% and 12%.

This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially.

And for your information, we are currently trading at close to PE 19.

So as you saw, investing at lower PEs gives bumper returns. But does it mean that it will always be so?

The answer is No.

Why?

Because the above numbers are ‘averages’. To explain this more clearly, lets take an example. Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?

You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.

That is how averages work. Isn’t it?

So this needs to be kept in mind. And to handle this point, I have also found the maximum and minimum returns during all the periods under analysis.

Nifty PE Analysis 3 Years
Nifty PE Analysis 5 Years
Nifty PE Analysis 7 Years
Nifty PE Analysis 10 Years

As you can see, there is a big difference between the minimum and maximum returns for almost all periods. So the returns that you will get will depend a lot on when exactly you enter the market. Yes, it sounds like timing the market. But this is a reality. For those who can, timing the market works beautifully.

But point is that most people can’t – And this is the reason why they shouldn’t try it either.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10 year), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the average returns. 😉

This is another reason why I introduced the column for standard deviation in all tables above (see last column).

Analyzing standard deviation tells you – how much the actual return will vary from the average returns. So higher the deviation, higher will be the variation in actual returns. I strongly recommend you read this post on importance of Standard Deviation by Prof Pattabiraman here.

Now, lets touch upon a very important point. Buying low makes sense. So should you wait to only invest at low PEs? Though it might make theoretical sense to do it, fact is that it is very difficult to wait for low PE markets.

Look at the time spent by the index at sub-PE12 levels.

It is just about 2% of the time since 1999 (Ref: Column name ‘Time Spent in PE Band’ in tables above).

Markets at below PE12 are extremely rare. For common investors, it’s almost impossible to wait for such days – that might be spaced years apart.

Another useful thing to note here is that as your investment horizon increases, the expected returns more or less are good enough, even when one invests at high PEs.

So, even if an investor puts his money in the index at PE24, the expected average returns are more than 12%. That’s pretty good enough.

And what about the maximum and minimum achieved since 1999?

At 13.8% and 10.5% respectively, these are not bad either. This is what really shows that if you are investing for long term, equity is your best bet for wealth creation.

The longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels. On the contrary, if someone was thinking to invest at high PEs (above 24) for less than 3 years, then I am almost certain that this person will lose money.

Recommended Reading:

  1. Becoming a Value Investor using Nifty PE Ratio
  2. A Small Guide I refer to when investing in Stock Markets

Now you might be tempted to ask – what is it that I do with my own money (after knowing all this since I have been doing this analysis for past many years)?

The answer is that I have tried to keep my financial life simple.

I have few base SIPs running all the time. I don’t disturb them whether it’s a low PE market or a high PE one.

Since I am also interested in giving booster shots to my long-term returns, I invest additional amount when I feel comfortable with valuations on the lower side. I also keep a Market Crash Fund that I use every now and then. I have covered about it in detail here, hereand here. But I don’t recommend that approach to anyone. It’s for people with time and intent to track markets closely.

For most readers, knowing the market PE gives a broad idea about the valuations of overall markets. It helps ensure that you know when the markets are over-optimistic and hence, it reduces the chances of making mistakes when investing. It also helps in knowing when the overall mood of the market is down and probably, full of more than necessary pessimism. Let your base SIPs run irrespective of market levels. But see if you can benefit from some of the insights that analysis like above provides. 🙂

Reminder: I am talking about index-valuations here and not individual stocks.

A reader had asked me to create a PE chart to show monthly changes in Nifty valuations. Heat Map below shows monthly Nifty valuations – based on index’s monthly average PEs.

Nifty PE Analysis Long Term
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Had the 2003-2007 Bull Market & 2008-2009 Bear Market not been so Severe?

Dear Readers, I am playing God in this post. 🙂
Everyone keeps talking about the severity of Indian bull market of 2003-2007 and the bear market of 2008-2009.

Now almost nobody actually expects Indian markets to rise like it did between 2003 and 2007. I read an interview online, where a market commentator said that “2003-07 was really a macro-bull market where… you had four years of 40% compounded earnings growth without inflation and interest rates falling.” That is almost (un)repeatable. Also, nobody expects our markets to fall like it did between 2008 and 2009.

2003 2007 Bull Market 2008 2009 Bear Market


Interestingly, most people feel that these two phases were once in a lifetime opportunities for investors. And I personally don’t doubt it. Its rare to have a bull market that rose almost 40% a year for more than 4 years. And its equally tough to have a bear market which falls by more than 50% in just about 15 months.
Now I am not trying to predict whether similar bull or bear market moves will ever happen again or not. What I am trying to do is to answer this simple question:
What would have happened if the Bull and Bear markets between 2003 and 2009, were not as ferocious / severe / eye-popping as they actually were?
Now there might be complex statistical approaches to provide a solution to the above question. But I am not a world-class statistician. And honestly, I did a Google search to find whether similar analysis were done in past or not. And as expected, nobody wasted his or her time on this 😉
But I decided to answer my own question. And for that, I did the following:

  • Took Sensex data starting from January 2000.
  • Assumed (approximated) the Bull market started on 1st January 2003.
  • Assumed the Bull market ended on 31st December 2007.
  • Assumed the Bear market started on 1st January 2008.
  • Assumed the Bear market ended on 9th March 2009.
  • During the bull market from 2003 to 2007, I relaxed the index movements by 10%.i.e. if index moved by 100 points, only 90 points were considered.
  • So if Sensex was at 1000 on 1st Jan 2003, and it moved +10 points on 2ndJan to close at 1010, then at the 10% relaxed level, Sensex would have instead closed at 1009 (= 1000 + 90% of 10 points).
  • From there on, a new alternate Sensex would come into existence and which will only consider 90% of the actual movement for index level calculations.
  • Same thing was repeated during the bear market of 2008-2009.


So effectively, what I did was to reduce the impact of Bull and Bear markets by 10%. Resultantly, all daily movements between 1st Jan 2003 and 9thMarch 2009 were 10% less severe.

Then this entire exercise was repeated using 20% relaxation!
Here is the result of this exercise:
Indian Bull And Bear Markets

As you can see above, the graphs for both 10% and 20% Relaxed-Sensex levels look strikingly similar to the graph of actual Sensex. But that is not strange considering that I have just reduced the intensity of daily movements by 10% in one case (Red) and 20% in other (Green). I have not made any other modifications.
Now comes the interesting part.
10% Less severe Bull and Bear market
The Sensex was at 3377 on 31st December 2002. Now when the bull market ended on 31stDecember 2007 (assumption), the index had reached a high of 20,287. If we relax the index movements by 10% (as described above), it would have reached 17,155.
2003 2007 Bull Market India
Lets see what happened in the bear market of 2008-2009:
Now index crashed from 20,287 to 8160 in just a matter of 15 months. Had the fall not been so severe (and also assuming the rise had been less severe between 2003 and 2007), the index would have gone down to 7,637. It is lower than actual level, but in percentage terms, the fall is less severe considering the peak was 17,155 (and not 20,287).
Lets move on and see what happens when index movements were further relaxed by say, 20%.
20% Less severe Bull and Bear market
Sensex in this case would only have risen upto 14,469 in 2007 and fallen to a low of 7112 by March 2009.
  
2003 2007 Bull Market India 20%  2008 2009 Bear Market India 20%
When the Bull + Bear markets (2003 – 2009) are looked at in totality (without, as well as with 10% and 20% relaxations), following results are obtained:
Actual Project Sensex India
As you can see, even after reducing the daily movements by 20%, index still managed to do a pretty good job between 2003 and 2009. And that is inspite of having witnessed one of the worst bear markets ever. This points at the (almost) unbelievable rise of Indian markets between 2003 and 2007.
Now I am not trying to come up with any insights here. This post is all about exploring a ‘WHAT-IF’ scenario. A scenario where the bull and the bear markets, were not as severe as they actually were.
Why I did this?
5-word answer will be sufficient here:
Just Out Of My Curiosity. 🙂
Caution: No part of this post should be considered as an analysis on which, you should base your future investment decisions. My curiosity can result in your losses. And you (or I) don’t want it. 😉

Note – For those who are interested in knowing about the Sensex levels, had the so-called Sensex relaxation approach followed till recent times, the Sensex would have been at 24,596 and 22,905 at 10% and 20% relaxation levels on 31st August 2015. Actual Sensex was at 26,283. But please note that relaxation was only applicable between 2003 and 2009. After that normal daily index movement (in %) was applied to arrive at these fictitious Sensex levels.

Dividend Yield Analysis of Nifty in 2015 (Since last 16+ Years)

This is the analysis of 3rd and final indicator which I track on a monthly basis in the State of Indian Markets. The previous two posts have analyzed P/E Ratio and P/BV Ratio of Nifty since 1999, i.e. a dataset of more than 16 years.

The data for this and all previous analysis has been sourced from NSE’s official website (link 1 and link 2). Since data prior to 1st January 1999 is not available on the website, the analysis starts from that day itself..

So here is the result of the analysis…


The table above shows that if one is investing in markets where Dividend Yield (DY) > 3.0, returns over the next 3, 5 and 7 year periods have been an eye-popping 55%, 40% and 27% respectively. But if you think that you are smart enough to time the markets and invest only when DY>3.0, then let me tell you that it is really very tough. Markets with DY>3.0 are extremely rare. And to give you an idea about the rarity, here is a fun fact…

The markets have been available at DY>3.0 on only about 28 days since 1999, i.e. in 4000+ trading days!! Now you know how tough it is. And though as everyday investors, it’s almost impossible to wait for such rare occasions, it shows the power of long term, patient investing for those who know when to wait and when to jump in the markets.

On the other side of this return spectrum is DY<1.0, where returns over a period of 3 years drops down to a mere 2.2%

For your information, currently Nifty is trading at Dividend Yield of 1.23%

Below are three graphs to provide details of the exact Returns against the exact dividend yields on a daily basis (though arranged with increasing PB numbers).

The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)




All three graphs clearly show that there is an direct correlation between Dividend Yield and returns earned by the investor. Higher the Yield when you invest, higher the expected rate of return going forward.

This completes the analysis of 3 key indicators. A few readers have mailed me and requested to combine these 3 Analysis and make it available online at one location. In few days, I will do a Comprehensive Post covering all three indicators P/E Ratio, P/BV Ratio and Dividend Yields and a few other findings about these 3 indicators.

Hope you found this and previous two analysis useful…

P/BV Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

In continuation of the last post about P/E Ratio Analysis of Nifty since 1999, here is a similar analysis of Price–to-Book-Value Ratio. Like PE Ratio, I have been regularly tracking this 2ndindicator to gauge overall market sentiments at the State of Indian Markets on a monthly basis.

The data once again has been sourced from NSE’s website (link 1 and link 2) and starting from 1st January 1999. Ratio related data prior to this period is not available. So here is the result of the analysis…


The table above clearly shows that if one is investing in markets where P/BV < 3.0, returns over the next 3, 5 and 7 year periods have been in excess of 20%… i.e. 26.3%, 26.9% and 21.4% to be precise. On the other hand if investment is made when index P/BV exceeds 4.5, the returns have been quite unacceptable at 3.3% and 5.7% for 3 and 5 year periods.

Like we saw in previous post, this clearly indicates that when investments are made at high P/B levels, chances of sub-par (and even negative) returns increase substantially.

For your information, currently Nifty is trading at P/B Ratio of 3.8

But here is another interesting thing which can be observed. Even at a costly PB>4.5, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.6%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

Below are three graphs to provide details of the exact Returns against the exact P/B on a daily basis (though arranged with increasing PB numbers).

The left axis shows the P/B levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)





All three graphs clearly show that there is an inversecorrelation between P/B Ratio and returns earned by the average investor. Higher the P/B Ratio when you invest, lower the expected rate of return going forward.

After P/E Ratio Analysis and this post on P/B Ratio Analysis, next I will be sharing my findings on a similar analysis for Dividend Yield of Nifty for last 16 years.

P/E Ratio Analysis of Nifty in 2015 (Since last 16+ Years)

It seems like a season of Excel-based Analysis. You must have noticed that majority of the posts I have been doing in last 1 or 2 months, use Excel-based analysis. Though there is no particular reason for this, here I am back again with another analysis. Don’t worry…it’s not a very complex analysis. It’s simple and very useful…

Regular readers would be familiar with my ‘fetish’ for tracking State of the Indian Markets on a monthly basis. And I make it a point to update the data set every year to update the yearly returns calculations. I have been doing this every year since Stable Investor started, i.e. in 2012, 2013and 2014.

So this post is about analyzing P/E Ratio of a popular index Nifty50 and the returns earned in 3, 5 and 7 year periods, when we invest (theoretically) in the index.

But before I move forward, you might question the rationale of doing such an analysis. And that too, on a regular basis. The reason is very simple. This small effort ensures that I have a broad idea about the valuations of overall markets. It helps ensure that I am not entering markets, when they are over-optimistic. This in turn reduces the chances of making mistakes when investing for long term.

It also helps me in knowing when the overall mood of the market is dull and full of pessimism. In past I have been unable to utilize such times to invest heavily. But I do not want to miss out on such opportunities in future. I hope you understand what I mean… 🙂

So let’s go ahead with my findings…

The data has been sourced from NSE’s website (link 1 and link 2) and starting from 1st January 1999. Ratio related data prior to this period is not available.

So here is the result of the analysis…


The table above clearly shows that if one is investing in markets where PE<12, returns over the next 3, 5 and 7 year periods are astonishing 39%, 29% and 25% every year. That is money doubling almost every 2-3 years!!

But markets with PE below 12 are very rare. To give you an idea about the rarity, the markets have been available at PE<12 on only about 50 days since 1999, i.e. in 4000+ trading days!!

Though as average investors, it’s almost impossible to wait for such days, it shows the power of long term, patient investing for those who know when to wait and when to jump in the markets.

On the other end of the spectrum is PE above 24. These are levels which are quite overvalued and returns over the next 3, 5 and 7 year reduces to (-)5.1%, 2.7% and 9.9%.
This shows that if you invest in high PE markets, your chances of low (and even negative) returns increases substantially.

And for your information, we are currently trading at PE=24 😉

But here is another interesting thing to note here. Even at a costly PE24, if an investor stays invested for more than 7 years, then average returns are still a very decent 9.9%. And this shows that longer you stay invested, higher are the chances of making money in stock markets….even if you have entered at higher levels (Caution: I am talking about index investing here and not individual stocks).

If you are still not convinced with the data shown in above table, I have a few graphs for you. These graphs have been plotted to show the exact Returns against the exact PE on a daily basis (though arranged with increasing PE, PB and decreasing Dividend Yields). 

Three graphs – one each for 3-Year, 5-Year and 7-Year Rolling Returns:

The left axis shows the PE levels (BLUE Line) and the right axis shows the Returns (in %) in the relevant period (Light Red Bars)


The 3 Year graph clearly shows that lower the PE when you invest, higher are the chances of making good returns in short term like 3 years and 5 years (graph below). Yes… I consider 3 and 5 Years as short term. 🙂


Now, interesting thing about 7 Year graph below is that there are no negative returns. 🙂 What does it mean? It means that it is very difficult to earn negative returns if you invest for long periods like 7 years, 15 years or even 30 years!!


Next I will be sharing my findings on a similar analysis for Price-To-Book-Value Ratio, followed by one for Dividend Yield of the Nifty since 1999. Hope to do it in a day or two.

Latest P/E Ratio Analysis of Indian stock markets

The markets are falling. Experts all over are painting the picture of India’s economic future with dark colors. People around you are selling shares and stopping SIPs in mutual funds.

So what exactly is happening? We tried answering this question in one of our previous posts titled What’s happening to stock markets, economy & your portfolioMany people known to us are exiting markets because markets have not produced any return for last 5 years. In fact, it has gone into negative territory in this 5 year period. But this very fact should have forced a sensible investor to think rationally and stay put in market. We did a small study some time back and came up with a conclusion that “If returns in last 5 years have not been great, chances of making higher returns in next 5 years are quite high.”

In fact, we started this website with posts evaluating traditional valuation parameters like PE etc for Indian markets. And surprisingly, we found a really interesting pattern which showed that Indian markets have a tendency to bounce between PE multiples of 12 and 24!!(see how here).

So we decided to see where exactly are Indian markets placed in terms of PE multiples when compared to historical levels.

As of now, Nifty (a benchmark index) has a P/E Ratio of 15.7. Now when compared with past data, this is not expensive at all (considering growing nature of Indian markets). But this time around, problems surrounding us (& lack of solutions) are forcing us to question the very nature and sustainability of India’s growth. Therefore, this PE Ratio of 15.7 cannot be considered to be cheap either.

So does it mean that markets will go down more? Does it mean that Indian markets are going to be re-rated soon? Frankly, we don’t have answers to such speculative questions. But yes, times ahead do seem to be tough and only tough and robust businesses will survive.

Nevertheless, we ran up some calculations and found that there is some correlation between overall market PE levels and return which you can expect to earn over a 3 or 5 year period. Table below shows the same and is quite self explanatory –

15 year Analysis of Indian market’s P/E Ratio (1999 – 2013)

To summarize, lower the overall PE levels of market, greater would be your return over a 3 year or 5 year period.

Assumptions – This analysis is based solely on Nifty’s past data. Same may not be repeated in future. But chances of repetition are quite high. Returns offered by individual stocks may wary quite a lot from this data.

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Last 5 Years, Next 5 Years – A small study on Indian Stock Markets

Everyone interested in stock markets these days has following perception:–
Markets have not done anything in last 5 years. The index has not moved anywhere at all!!
And that is true. Numerically speaking, markets seem to have done almost nothing in last 5 years (2008-2013).
Now it seems sensible & obvious that one should buy low and sell high. But what should one do when markets have not done anything substantial in last few years? And we are not talking about individual stocks here. We are talking about broader markets. The indices. Individual stocks can take an altogether opposite trajectory than the market.
To answer this question, we decided to look back into the past. We analysed Nifty’s data for last 22+ years (1990-2013). We checked this data for two things:
  • Returns during last 5 years (for everyday since 1995)
  • Returns during next 5 years (for everyday till 2008)

And what we found is summarized in table below –
 

Returns in last 5 Year – Returns in Next 5 Years – Correlation

What the above table means is that – “If returns of last 5 years are not great, chances of having great returns in next 5 years are pretty high.”
Now that should bring a smile on faces of those who keep cribbing about poor returns in last 5 years. 🙂
So will the market give stellar returns in next 5 years (2013-2018)? The answer is that we don’t know. But as per historical data, chances are quite high.

So, will you take chances now? Will you go ahead and invest for next 5 years? What will you do?

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Large Cap Nifty Stocks – Returns since our call in December 2011

Important: Don’t miss the last paragraph.


When we wrote Large Cap Nifty Stocks available at deep discounts in December 2011, we were very excited to find a number of great companies available at very cheap prices. And since the world as well as Indian economy hadn’t fully recovered, it was really common sense that one stuck with businesses which could weather the economic turmoil. We advised and bought a few of these large caps for our personal portfolios.

So after an year, when index has given 25% returns, we checked the performance of individual stocks. And we must say that we are more than happy to see around 15 stocks giving 40% + returns. But there are a fair number of duds too. There are 10 stocks which trade at discounts compared to December 2011 prices.

Large Cap Nifty Stocks Returns One Year
Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)
As of now, markets are trading at a PE of close to 19 and since markets have run up around 800 points in last 4 sessions, we are not sure if it’s a good time to pick stocks. We would rather wait and watch for the time being.

Caution: Our post might make you believe that we have good predictive capabilities. The fact is that we don’t. Why? Markets have risen 25% in last one year. So have all stocks representing the market. And as Warren Buffett said: A rising tide lifts each and every boat. You only find out who is swimming naked when the tide goes out.

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