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The latest edition of the MarketVision Chronicle has Seven Reasons Why We’re Still Overvalued, Nifty Gaps Covered and More at MV.
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This week we talk about how stocks, despite having fallen down a cliff in the last week, are still overvalued. Temporary pullbacks aside, we need to be worried as our economy slows down. A smaller piece on Nifty gaps follows, and of course, we end with all at MarketVision.
Stocks crashed after the RBI monetary policy was announced on Tuesday, with Wednesday and Thursday also showing deep drops. The index recovered on Friday, but a small 1.7% pullback didn’t do much about overall downward sentiment.
I will argue that stocks and in general, a lot of the India growth story is overvalued. We are still a growth story but we are being given a price that is far more than it’s worth today. A few exhibits will show you why.
Nifty’s Price to Earnings ratio is still above 20, and so is the Sensex’s. The historical average, since 1999, is 18.3.
For most of the early 2000s, our Nifty P/E was way under 20 – we have been, irrationally perhaps, spending the last two years above 20, fairly obstinately.
More importantly, Nifty EPS Growth – even annualized – is expected to be close to nominal GDP growth. Our nominal GDP grew 20% last year, and as results came trickling in, it seems the Index EPS growth of Nifty is short of 14%. You don’t pay a 20 P/E for an EPS growing so much lower.
Nifty covered the gap at the 5500 levels that I have been talking about in the last few newsletters. The move was surprisingly fast, but the gap was closed decisively.
Gaps are interesting.
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