Morgan Stanley thinks the Sensex is about 11% above fair value. (Tip:toughiee). The fair value, they say, is 13,651, a value about 11% lower than than the current.
The Sensex, plotted with its historical P/E and EPS Growth, makes for interesting reading.
Notes:
- From November 2004 to April 2006, EPS growth % was greater than the P/E. The sense shot up from 6000 to 12000 in that time.
- Since April 2006, EPS growth as been choppy, and largely has remained below P/E. Yet, the Sensex as climbed from a low of 9000 to 15,000 today. Earlier, from 1997 to mid 2000, the EPS growth trailed and was indeed negative, yet the sensex went from 3000 to 5000+.
- The exuberance in the markets in 1999-2000 must have contributed to high P/Es in the face of declining earnings.
- Current EPS growth is around 20, and the P/E is around 20. Not unfairly valued; yet, earnings growth since April 2006 have trailed the P/E. And in this period, the sensex has moved remarkably fast – from a low of 9000 in Jun 06 to a high of around 15,500 today.
- Sensex EPS growth has been muted in the last quarter. It will be important to note if the EPS continues to contract its growth – if the P/E doesn’t follow, we enter a stage of exuberance.
Such charts have little tradeable value but it’s important to know where we stand historically – to see if a pattern existed. I don’t have data going back earlier than 1994 so some of this is statistically too little; but even with this I can’t see a distinct pattern in there, except that when earnings SERIOUSLY lag the P/E, there is a case for markets to fall (and even that can take two years!).
Do you see anything in there that could be useful?
