When Indices are flirting with previous peaks, an undue excitement is being built in investors on whether the prices will hold or correct like last time. Companies engaged in extending financial services in India are busy forecasting a deep correction upon Nifty reaching the peak one more time. After the meltdown of Lehman brothers in 2008, markets worldwide crashed pulling Indian markets too down by about 50% or more. After US announced QE and the world managed to contain the spread of gloom by liberal monetary easing across the world, markets turned upwards and most markets scaled earlier peaks within two years. Nifty crossed its peak on November 3, 2010 only to see some correction again. Because it failed to go past the previous peak with authority, many pundits have set that peak as a psychological barrier for Nifty’s upward journey.
Against this backdrop, the significance of such resistance levels need a closer look with special focus on Nifty Investment Portfolio and its earnings . If earnings have a role in price formation, the previous peak has no value whatsoever except the psychological resistance level from weak hearts. Any entity involved in Investment Advisory activity ought to consider the hard facts about earnings than going by market buzz and gossip to scare away the retail investors. Vivekam will always be in the forefront to be vocal in what it strongly believes in. We take pride in being engaged in the business of Financial Services in India.
From the graph here you will notice that earnings of Nifty in 2008 when it reached peak for the first time stood at 220 levels. Again when it touched the peak in 2010, the earnings were at 276. If one were to believe that both levels at those times are justified, based on current earnings of 364 ( as on 29th October 2013), Nifty should be trading at 8283 by taking the PE multiple of 2010 or at 10380 by taking the PE multiple of 2008.
Even if we wish to discount the raised anxieties of investors, post Lehman brothers shutdown and subsequent developments at Europe, one cannot ignore the impact of improved earnings. Though India’s growth rate is being revised downwards by many, still it is higher than the growths reported by most developed countries. Hence a minimum of historic PE multiple should be granted to Indian Indices, to be fair in valuation models. Historical average of past 5 years being around 19, the least Nifty should be trading should be 6916 levels.
We have considered the PE multiple of 2008, 2010 and historical average of last 5 years to come up with values of 10380, 8283 or a minimum of 6916. While pessimists may chose to fear about unknown, the optimists may jump at Indian stocks with a view that 2010 PE levels seem a clear possibility. FIIs can’t be foolish in their judgment about our stocks. They actively engage themselves in Portfolio Analysis and Management of Indices they want to take bets on.
By being bearish for unknown factors, we will be proven to be foolish if we continue to stay away from the market for far too long. After all, all of us know that the price formation in stock markets do consider the earnings of underlying stocks over a period of time.