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If PE Ratio is 10 it means that 'You are paying 10 Rs. to the company, for the company to earn 1 Rs.' So, the lessor the PE, the better the deal will be.
Think about NIFTY50 PE as 12 or 36 which is better? Of course 12. Let's see the trend of NIFTY50 from last 12 years. The highest number in the below table is 36.46 and that too in DEC 2020, that's why investors are shouting NIFTY50 as 'Overbought' or 'Overvalued' and whenever it happens, investors tend to sell (book profit) and market tumbles.
How come NIFTY50 PE reaches to this level? that's because of FII invested in India like anything, They invested almost 65,000 Cr in a single month of Nov 2020 (The highest single month investment in the last 20 years) mainly due to vaccine optimism and an increase in India’s weightage by MSCI in their global Emerging Markets Index to 8.7% from 8.1%. This increase in weight could have resulted in a passive flow of over $2.5 billion.
An improvement in economic scenario post COVID-19 and the strong result season apart from High liquidity infusion by central banks can also be one of the reasons.
The interesting part is Domestic investors are as much as Bearish as Foreign Investors are Bullish. Big domestic Investors sold stocks worth 48,000 cr.
So, technically when Foreign Investors will turn Bearish, market may go one way i.e. downside.
So if you know that the market is expected to go down in short to medium term then where to invest?
Here are the necessary steps that worked well for me since long:
1) Select one index. Say NIFTY50, S&P BSE SENSEX, Nifty Next 50, Nifty Midcap 100, Nifty 500 etc. For the demonstration purpose I would take NIFTY50
2) Place the stocks in descending order on the basis of yearly returns:
3) Focus on the stocks who have not participated in the bull run. (Last 14 stocks in the above list)
4) Perform technical analysis and see which of these ones are bullish on charts or on fresh break-out. (In the above list ITC, HDFC, COAL INDIA, IOC & SBI life are bullish on charts).
5) Perform fundamental analysis and make sure the ones you have selected out of it must not be debt ridden and running on low interest coverage.
Done! Now you can invest out the final selected stocks and expect good returns in mid to long term.
Markets ran up 11% in November but markets cannot keep on doing that forever, you are going to get a correction. But you do not know when that is going to happen. you are never going to know what is the peak and what is the bottom. The markets are at all-time highs all over the world, who knows you could see a global selloff and that is a risk that will not spare India in the short run.
There are numerous opportunities in the market, take the example of PSU Banks. If you are a very strong fundamentals-oriented person, you may argue that PSU banks stocks are trading at price to book ratios which have never been seen in the history of their trading, Even if you adjusted to book value for all the losses that could potentially come through, the price to book values are still relatively attractive.
There is an excessive optimism in the market and there are fundamental reasons behind it. Covid cases, at least in India, are turning out to be quite manageable. We do not really have a second spike despite the winter & festive season, vaccine should be available in the next few weeks, RBI says they will do whatever it takes to get the growth to become broad-based and the border situation has helped increase awareness about improving domestic manufacturing capabilities.
With such growth opportunities, higher valuations should be expected to sustain. We are a capital hungry nation. Lot of flows can be absorbed to propel growth.
Research Analyst (SEBI Regd.)
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