Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

2015 Ends At An Inflation Adjusted Nifty Even Lower Than 2010

If you’re invested in the Nifty, you might think, that at 7,900 it’s way higher than the “highs” of 6300 in 2007. In reality, though, inflation has eaten through your returns, and how!

We measure the Nifty as adjusted for inflation – by adjusting what Rs. 10,000 could buy, using the CPI. The chart (red line) depicts the growth of Rs. 10,000 in constant purchasing power terms – that is, adjusted for the Consumer Price Index. We take the Nifty including Dividends reinvested, which is depicted in an

Nifty Adjusted for Inflation What we find is:

  • The market has done very well over 15 years – more than double in constant purchasing power terms (10,000 becomes 22,000)
  • However most of that return came till 2007. Since then, inflation is a dampener
  • The highs of Dec 2007/Jan 2008 are still a “high” in purchasing power terms. Even now, after 8 years, as the Nifty is about 40% higher, Inflation means the Nifty adjusted for inflation is 24% lower than the Dec 2007 high.
  • And at the current point we are even lower than the intermediate high we saw in 2010! (in purchasing power terms)

What this has meant is a “lost 8 years” for India. Even 2015 was a lost cause – with a 4% down year on the Nifty, and 6% inflation.

Note: We said in January 2015 that the Nifty was breaking through new highs, but wasn’t a high adjusted for inflation or for the P/E ratio. But hey, the P/E ratio has risen through the year, largely because Nifty company earnings have collapsed. More on that in another post!

[wpob id=”8″]

  • rakesh ojha says:

    Thank you for the data. Very important way to look at the returns. Please note that very good returns in last 15-20 years was possible because of low PE 15-20 years ago. In the range of 12-15. Now since 2005 our PE is in the range of 18-24. The fact that sensex is expensive will be a big dampener on future returns also. There is no way next next 10-15 years will give similar returns as last 15-20 years. They will be likely close to 10% than 15-20% people are used to. Staring point/buying valuations is key. Remember Howard marks video that you posted few days ago. Pl find following article in BS.
    Sensex gets expensive for fourth straight year
    Longest period of price-earnings expansion in the index since 1996; experts reckon investors should remain cautious
    Krishna Kant | Mumbai
    December 27, 2015 Last Updated at 17:16 IST
    Tiny URLAdd to My Page 4
    Sensex, Markets Photo: PTI
    Forward earnings forecast can mislead
    Playing the index on valuations
    Nifty more expensive than other emerging world indices
    100+ PE stocks: Should you worry?
    In trend reversal, rich nations’ corporate earnings stand out
    Market valuation is up for the fourth consecutive year in 2015, a first in the last twenty years. The benchmarkSensex is now trading at a little under 20 times the underlying earnings of its 30 constituent companies, up from the price-earnings multiple of around 19 times at the end of last calendar year. The benchmark valuation (P/E) is up from the 16.4 times earnings — the low of December 2011 — to 19.6 times now.
    This is longest period of valuation expansion in the index since 1996. The previous record was during the boom years of 2004-07 when the Sensex earnings multiple expanded from 17x at the end of 2004 to a peak at 27.7x by the end of 2007. This boom was followed by the crash the following year when valuation dipped to a 13-year low of 12.4x by the end of 2008.
    The analysis is based on the year-end Sensex value and the index trailing price-to-earnings multiple for the last 20 years. The index underlying earnings (per share) have been calculated by inverting the P/E ratios for respective years.
    The current rally has lasted longer despite poor earnings growth compared to the previous boom. During 2004-07, Sensex companies’ underlying earnings had grown at a compounded annual growth rate (CAGR) of 23%.
    In contrast, the underlying earnings are down 10.1% in 2015 and a third (11 out of 30 companies) of the index companies reported profit decline during the 12-months ending September this year. In all, the underlying earnings of the index companies have grown at CAGR of 8.7% since the close of 2011.
    Meanwhile, the index has appreciated at the rate of 13.7% during the period. Investors have earned double-digit returns in the last four years despite 6% fall in the benchmark index in the current calendar.
    The current year is also the first occasion in a decade when the BSE Midcap and the BSE Smallcap indices have outperformed the benchmark Sensex for the second year in a row. In the past, they used to beat each other every alternate year — an outperformance in Sensex followed by a better show by mid and small cap shares the following year and vice versa.
    BSE Midcap and Smallcap indices are up 5.9% and 5.3%, respectively, in 2015 against 6% decline in the benchmark. Last year, the former were up 54.7% and 69.2%, respectively, beating the Sensex which appreciated 30%.
    The growing mismatch between corporate earnings and stock market valuations raises the prospects of a market correction in the New Year and quite a few analysts are suggesting that investors should remain cautious.
    “The rally is driven by the hope of an imminent revival in the economy and corporate earnings. Corporate earnings have disappointed in the previous two quarters, creating a wedge between valuations and underlying fundamentals. I will advise investors to be cautious in the next year so as to avoid surprises,” says G Chokkalingam, founder & CEO, Equinomics Research & Advisory.
    While Chokkalingam remains hopeful of an earnings revival in 2016, he doesn’t rule out a nasty surprise given deflationary pressure in the world’s major economies. “Six countries have pushed interest rates into negative zone in a bid to fight deflationary pressure in their economies. This is a big overhang on India Inc, and we have to be watchful about this,” he adds.
    Others blame it on the elevated base last year besides unexpected earnings contraction in few large companies. “The current high valuation is an optical illusion as earnings peaked last year due to the festival season falling in the September quarter. This year, the festival season was pushed into the December quarter, spoiling year-on-year comparison,” says Anoop Bhaskar, head — equities, UTI Mutual Fund. The current Sensex earnings capture corporate results for the 12-months ending September this year.
    Bhaskar expects the valuation ratio to “normalise” in 2016. “Valuations have peaked and will moderate as the base effect of poor earnings and lower commodity prices kicks in during the New Year,” he adds.
    Thus, investors could expect faster earnings growth in 2016 because of the above reasons, but experts say stock prices are unlikely to rise as rapidly, which in turn, will result in a reduction of the P/E multiple. This is unlike what we have seen in the past few years, when nearly half of the stock returns came from valuation expansion or stock re-rating rather than from earnings growth.
    Sensex valuation and the underlying earnings growth
    Year Earnings Growth (%) PE Ratio (RHS)
    1996 30.0 12.2
    1997 7.5 13.5
    1998 -7.0 12.1
    1999 -8.7 21.7
    2000 -15.2 20.3
    2001 7.0 15.6
    2002 10.1 14.6
    2003 34.2 18.9
    2004 24.9 17.1
    2005 30.6 18.6
    2006 20.0 22.8
    2007 21.0 27.7
    2008 5.8 12.4
    2009 0.7 22.4
    2010 11.4 23.6
    2011 8.2 16.4
    2012 17.7 17.5
    2013 6.5 17.9
    2014 23.9 18.8
    2015 -10.1 19.6
    Note: Earnings growth based on year-end value and price to earnings multiple of Sensex
    2015 data for trade ended on December 23
    Source: Bloomberg
    Compiled by BS Research Bureau