State of Indian Stock Markets – June 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of an analysis of Nifty50‘s ratios, namely P/E, P/BV ratios and Dividend Yield.

But before that, lets see what happened in June 2016, which was a month of exits.

RBI Governor Raghuram Rajan said No to a second term and instead, has decided to return to academia (lucky him!) after his term ends in September. Read his address to RBI staff here.

People termed it as Rexit (= Rajan + Exit). I am a fan of Mr. Rajan for his sensible views and how he took a tough approach towards cleanup of PSU banks. Personally I think that having him around with the current PM in driver’s seat, would have been great for the economy. But life moves on and so will the Indian economy.


Then people of Britain decided to do a Brexit (= Britain + Exit) from the European Union (EU).

In short term, Indian markets were expected to react negatively to the news of Rexit. But that did not happen. Tells how brutal the markets can be towards people’s expectations. 🙂 As for the Brexit, there was a knee-jerk reaction when indices fell more than 2% in a day (might look like a big drop in short term but is nothing when long-term is considered). Some stocks whose business is dependent on British and European economy, witnessed far deeper one-day cuts. But markets seem to have recovered since then. Experts are still trying to predict the consequences of Brexit. But no on seems to be sure about the actual impact. Whether it will result in a mild recession in UK or whether government will eventually disregard people’s verdict in referendum and stay back in EU – no one knows anything.

Coming back to the state of our own markets…

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The heat maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

Don’t make any investment decisions based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Price to Earnings Nifty June 2016

P/E Ratio (on last day of June 2016): 22.75
P/E Ratio (on last day of May 2016): 22.60


P/BV (Monthly Average)
Price to Book Nifty June 2016
P/BV Ratio (on last day of June 2016): 3.37
P/BV Ratio (on last day of May 2016): 3.40

Dividend Yield (Monthly Average)
Dividend Yield Nifty June 2016
Dividend Yield (last day of June 2016): 1.25%
Dividend Yield (last day of May 2016): 1.32%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, please have a look at these 3 posts:


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State of Indian Stock Markets – May 2016

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of Nifty50’s P/E, P/BV ratios and Dividend Yield.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum values of each month.

Caution – Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a river which had an average depth of 4-feet. 🙂

So do not make any investment decision based solely on just one or two ‘average’ indicators. At most, treat these heat maps as broad indicators of market sentiments.

So here are the Heat Maps…


P/E (Monthly Average)
Nifty PE May 2016


P/E Ratio (on last day of May 2016): 22.60
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)
Nifty PB May 2016

P/BV Ratio (on last day of May 2016): 3.40
P/BV Ratio (on last day of April 2016): 3.27

Dividend Yield (Monthly Average)
Nifty Dividend Yield May 2016

Dividend Yield (last day of May 2016): 1.32%
Dividend Yield (last day of April 2016): 1.37%


You can read about last month’s update hereThe State of Markets section has also been updated (link).

For detailed analysis of the relation between investments made at various P/E, P/BV and Dividend Yield levels and the historical returns, I suggest you have a look at these 3 posts:
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State of Indian Stock Markets – April 2016

I regularly update the State of Markets section (link) on Stable Investor. This time when I updated it, I took a step further and decided to try and publish heat maps for 3 popular ratios (P/E, P/BV, Dividend Yield) of Nifty 50, on monthly basis.

The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don’t show the maximum and minimum ratios of each month.

As with any such ‘average’ indicators, its worth saying that you should not make any investment decision, based solely on just one or two indicators. At most, these heat maps should be treated as broad indicators of market sentiments.

So here are the Heat Maps…



P/E (Monthly Average)


Nifty Historical PE Ratio
P/E Ratio (on last day of April 2016): 21.24


P/BV (Monthly Average)


Nifty Historical PBV Ratio
P/BV Ratio (on last day of April 2016): 3.27%


Dividend Yield (Monthly Average)

Nifty Historical Dividend Yield
Dividend Yield (last day of April 2016): 1.37%

For detailed analysis of what have been the historical returns for investments made at various P/E, P/BV or Dividend Yield levels, I suggest you have a look at these 3 posts:
I am planning to see whether I can also bring in data for some other mid-cap / small-cap indices from next month. Do share your feedback and help me improve these monthly State of Indian Stock Market posts.
 

Becoming a Value Investor using Nifty PE Ratio

First of all, I am overwhelmed with the responses I got for the financial concerns and issues survey conducted few days back. Thanks to you all, there are so many feedbacks that I am still reading through all of them.

And to be frank, I was surprised to see so many people being so honest and more importantly, aware of their financial issues. This awareness in itself is like a quarter (not half) battle won. I plan to regularly take up issues raised in the survey and do detailed posts around it. And here is the first one…

One of the readers had an interesting concern:

I am not a value investor. And nor can I become one as I don’t have the time to monitor or analyse stocks. But I still want to become a sensible investor who invests more when there is panic around. I have read that it’s wise to Buy Low and Sell High. I don’t want to think much about Selling-High right now, as I am pretty young. But I do want to invest more when everyone else is selling, i.e. I want to Buy-Low. But if I go for individual stocks, it can be risky. For someone like me, it makes sense to stick to mutual funds. But how can I know when to Buy More. Even if I invest regularly, shouldn’t I be buying more when markets are down and I have additional funds?

That’s a pretty reasonable concern of the reader. And I think that many among us do not really have the time to become real investors. We are better suited to piggyback on expertise of others.

So what I understand from this question is that he wants to become a Value Investor, without bothering too much about picking individual stocks.

Fair enough…I would say…

By the way, I don’t consider myself to be a value investor. At most, I am an opportunist who is interested in buying good companies, at relatively cheap prices and holding them for very long periods of time. And yes…every now and then, I do take up small short-term speculative positions as well. But these positions are small and generally not more than 5% of my overall portfolio size.

I know…the above paragraph is more like a disclaimer. So anything I say from here onwards should be considered as coming from the mouth of a self-confessed non-value investor and not an expert of any kind. 🙂

But jokes apart, it’s a fact that 95 out of 100 people who invest in stocks, would be much better off if they do not invest in stocks directly. They should rather stick with well-diversified mutual funds. And I am saying this not because I consider myself to be an expert or an authority in something (on the contrary, I am a pretty regular guy as detailed in 17 Unknown but Honest Facts about me). But because successful investing is more about our own personalities and discipline rather than just about picking the right stocks.

 

To explain this, lets take an example. Suppose your overall portfolio size is Rs 10 Lacs. Now you consider yourself to be a good investor and find a good stock selling cheaply. But you only invest Rs 5000 out of the Rs 10 lac in this stock. This stock goes on to become a multibagger (10X) – your Rs 5000 investment becomes Rs 50,000. But at an overall level, your portfolio of Rs 10 lacs only moves up by Rs 50,000 (or Rs 45,000 to be precise) ~ to Rs 10.5 lacs. Nothing much to boast of. Right?

So it is never just about picking the right stock. It’s also about position sizing and how convinced you are about the stock (and a thousand other factors).

Successful value investing is also about being prepared for the rare investment-worthy opportunities. This means that even if you have chosen the right stock, and are ready to allocate a significant part of your capital to this stock, you still need to have the cash to invest in the opportunity. Because if you don’t, you cannot become a value investor, of for that matter even a decently good investor.

So what should an individual who wants to do value investing, but not through specific stocks, do?

The answer is not very complicated. But there is a catch, which I will disclose after giving the solution.

Lets break down this problem statement into 2 parts:

  • Identify situations when it makes sense to invest additional money.
  • Identify investment options where one can invest

Here is the solution…

Part 1

 

It is not difficult to identify situations where it makes sense to invest more (and as much as possible) for an average investor. A real value investor can go and find undervalued stock in a bull market. But an average investor needs to be right first and then think about the return percentages. And chances of being right with individual stock picks are lower than that of being right about investing in a group of companies.

So here is an indicator (or rather 3), which give you helpful advise about when to invest more.

PE Ratio India Stocks
PBV Ratio India Stocks
Dividend Yields India Stocks

If you go through these above tables you will realize a clear correlation between these indicators (P/E, P/BV and Dividend Yields) and Returns you can ‘expect’ to earn when you invest on basis of these indicators. And here, by investing I mean – investing in a large group of stocks and not in individual stocks.

So…

Lower the P/E Ratio when you invest, better your chances of getting higher returns. (Proof)

Lower the P/BV Ratio when you invest, better your chances of getting higher returns. (Proof)

Higher the Dividend Yield when you invest, better your chances of getting higher returns. (Proof)

It is as simple as that. And a few years back, I even found a range of P/E ratios, which seem to control Indian markets. You will be surprised to see how clear this PE Band is!! I was mightily surprised when I say it first. Here is another interesting analysis of how much time Indian markets spend at various PE levels.

Now you would want to know how to track these indicators regularly. The answer is that you can either track it using this link on NSE’s website. Or you can check out monthly updations, which I make to State of Indian Market page.

Part 2

Now comes the second part. Once you know that it’s a no-brainer to invest at a particular moment, and you have the cash power to do it, the question is where to invest.

I know you would love to invest in individual stocks, see them become out-of-the-world multibaggers and boast of being a great stock picker. But lets be honest. It’s not easy at all. Even expert investors are unable to find great stocks easily. So for all practical purposes, individual stock picking is best avoided by average investor. End of discussion.

So where does one invest?

The answer is… in a group of stocks. A well diversified selection of stocks belonging to various industries, which as a group help in mitigating the risk of getting it wrong by investing in individual stocks. Yes. I am talking about mutual funds.

When its time to invest more (identified in Part 1), you need to invest heavily in well diversified and proven mutual funds (Part 2). Done. Nothing else to do. You will be rich. 🙂

So the action plan for you is:

  1. Invest regularly in a few good mutual funds through SIP.
  2. If possible, increase SIP every year by 5% to 10%
  3. Keep a regular track of P/E, P/BV and Dividend Ratio (DY) of overall market.
  4. If markets go down and with it PE, PBV goes down and DY goes up, you would do well to invest additional money in these mutual funds.
  5. If the thought of investing more when your portfolio is going down does not make sense to you, then you need to rethink whether stock markets are a place for you or not.

The above approach is like giving booster shots to your portfolio when markets are going down. I have done a comprehensive 4-part analysis on investing more when markets are down. Results of the analysis were surprising as it proved that just by keeping it simple, i.e. investing a constant amount regularly still made a lot of sense for majority of investors. But if you have additional money, which you can invest and forget for few years, don’t hesitate to put it in mutual funds.

I hope that with this post, I have been able to clarify on how to become a value investor by using just plain, simple mutual funds. Let me know if you all have any questions or suggestions for this post. It will help me improve future posts addressing financial concerns.

Note – Whenever you think about investing in stocks or mutual funds, make sure that you are doing it for atleast more than 5 years. There have been 5-year periods when stock markets did absolutely nothing.

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.