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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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.

P/E Ratio of Indian Markets in July 2014 – Is It Telling Us Something?

I regularly monitor index ratios like price-to-earnings, price-to-book values to gauge overall market sentiments. I know it’s a very crude way of doing it. But still it provides a decent picture of what is happening in markets.

Now here is something interesting what happened on July 7th, 2014.

Nifty 50’s P/E multiple crossed 21 after almost 3 years. Surprisingly, last it stood past 21 was also on July 7th (2011). That’s exactly 3 years back!

Long term analysis (starting end of 1998) of Nifty’s P/E ratio tells the following story…
PE Ratio India 2014
We all know its common sense to buy low (Low PEs) and sell high (High PEs). And we also know that its difficult to do it. So if you go out and buy the index as whole when P/E multiples are less than 12 (quite low), then on an average, your probable 3 year and 5 year returns will be 39.5% and 29% respectively.

Similarly for index-buying during P/E multiples being in between 12 and 16, the 3 and 5 year returns are 28% and 25% respectively.

But we are currently in the band of 20-24. And this is not a cheap market at all. As per past data, your 3 year returns and 5 years returns look bleak at 4% and 7%. 

So does it mean that we sell all our stocks and put money in bank deposits?

The answer is I don’t know.

The above numbers are based on data of past 15 years. And there is no guarantee that past performance may be repeated. Or whether this time it might be different.

The last instance of PE21, for which 3 year returns data is available (May 02, 2011), the market gave a return of 5.3%.

Similarly for last instance of PE21, for which 5 year returns data is available (June 11, 2009), the returns were 10.3%. Not bad considering the superiority over returns given by safer ones, but also not eye-popping considering the optimism we have for next 5 years.
Now we are all quite hopeful that the new Indian government, if permitted by external uncontrollable like oil-shocks, natural-disasters, wars, etc… would be able to provide a conducive environment for India’s return to high growth days.

But having said that, I also beg to differ with those who believe that this would be achieved overnight and Sensex will hit 40000 by end of 2015.


As for the current markets which are rising everyday, it seems that they are now running ahead of the actual ground realities. But it is this over-optimism that gives us, the long term investors a chance. Isn’t it? 🙂

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