A note I’d recently spoken about in Premium shows us something very important. Even as we had a near 2% down day (nothing compared to China which had an 8.5% down day) we are, er, slightly overvalued.
I plot the Price to Earnings ratio of the CNX 500, which is the broadest index we have in India. And in that way, I plot its earnings growth over the last year. And what you see is surprising:
We are at the highest P/E ratio levels since January 2008.
And we are at the lowest earnings growth levels in three years.
Markets go through phases of overvaluation and undervaluation. From Jan 2014 to Jan 2015, earnings growth for the broad index picked up, to reach 20% growth levels and since Jan 2015, results have been just disastrous.
Look at the CNX 500 EPS:
We haven’t seen damage of this magnitude on earnings since early 2009 – and markets were, at that time, less than 50% from the peak. We are currently less than 5% below the top!
You say this year hasn’t been so great? Okay, let’s take a rolling five year growth then. (Each red point on the graph below represents the EPS growth from five years earlier to that date).
Lets just remember this when we say “big fall”. We’ve been overvalued a long time now and even if we fell 30% from here, it wouldn’t be too much. Just a different perspective.