Nifty @ 9000

Nifty 9000

As the Nifty closes in on the 9000 mark, the standard question is what happens after that? Well, it is pointless trying to estimate the likely level of the Nifty but we can surely make a comparison with the last 2 market peaks of January 2008 and October 2010 to understand how the market compares. We will leave out the peaks of 2000 and 1994 as the markets are substantially different today compared to that period.

Hardly looks like a peak…

How exactly do you define a peak? While there are no clear definitions, 3 variables are normally used to give an idea of whether the market is expensive or cheap. When the Nifty made its first peak in January 2008, the Nifty was quoting at a P/E of 28.3. This average could still be misleading because sectors like real estate and capital goods were quoting at ridiculous valuations. The Nifty was then quoting at a P/BV of 6.55, a level not seen since the technology boom of 1999. But the biggest giveaway was Dividend Yield at 0.81 (Normally in India dividend yield below 1 has signaled a heated market).

Similarly, 2010 was also a year of stretched numbers. In October 2010 the Nifty P/E touched 25.91 and the P/BV got to 3.93. Dividend yield at 1.01 was just entering the concern zone. But there was a different kind of a problem. The 2003-2008 years were a high growth period, whereas in 2009 and 2010 growth had slowed substantially. Also, the 2010 peak was supported more by global liquidity infusion, making it all the more vulnerable.

That brings me to February 2015. The Nifty P/E at 21.5 and the Dividend yield at 1.3 are still within comfort zone. The P/BV at around 3.51 may look a bit stretched but that has more to do with a delay in the revival of the capital cycle. So in terms of valuations, while caution may be called for, it is not the time to be unduly concerned.

There are other factors too…

The sharp cut in oil prices and a global supply glut means that the transfer of wealth from oil producers to consumers is still on. Countries like India, China, Turkey and the Philippines will be the biggest beneficiaries. That will sustain interest in countries like India. But what if the US raises rates and FIIs pull out. Fortunately, the worry need not be big.

With a pick-up in equity MF inflows, India has a solid buffer. The inflows of the last 1 year have almost outweighed the outflows of the last 5 years. LIC is already a formidable force, as we saw in the Coal India FPO. That means, even if the US rates are hiked, India does not need to be overly worried. Unlike in 2008 and 2010, India is not exactly vulnerable to FII outflows. Call it oil or liquidity or God’s grace; Indian markets may actually be in comfort zone! ©

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