Hi Gautam - Interesting post and good to see you in action! There's another way P/E can go up, with the "E" part going down. From an EPS of nearly 236 in the last quarter (trailing 4 months) the Nifty EPS is 228 today. If the earning goes down to Rs. 200, then today's level still give us a P/E of 15...I'm not saying it will happen, but it's likely.
GIven that US S&P 500 earnings estimates for $2009 aer down from $100 earlier this year to like $50 today I think we're quite capable of going down about 10% in earnings. What do you think?
admin
· 1 year ago
Hi Deepak, thanks for your comment. Agreed. I do expect trailing EPS to go down further, which is why said that 'around' now, but not 'right now' is the right time to invest. If we assume a EPS drop of over 10% as you suggested could happen, to 200, but are able to invest at Nifty = 2500 that will give you a PE of 12.5 which isn't too expensive. If EPS falls by 20% to 180 then at Nifty 2500 the implied PE would be 13.9 - not exactly cheap but compared to our long term historical average of over 18 not exactly disastrous. If EPS goes south from there then I guess we're in the toilet anyway.
Its a little early to call but my feeling is that the technical rally that saw us climbing up from our low came to an end last night. As I write this comment the Nifty is already down almost a 100 points. If I see that the Nifty begins testing 2500 again I would slowly start accumulating, despite the downside risk on EPS.
Deepak Shenoy
· 12 months ago
I'm not sure where you got the historical average from (the NSE data before 2004 is flawed, they used to take annual results instead of TTM, which upped the average). If you look at historical lows, I have data on the Sensex that has lows of 10 as well, and given that RPower has zero and RPL has very little earning power, the EPS has very little going for it. Average P/E is less than 15 on the Sensex, and will be similar if adjusted on the nifty (this is TTM earnings)
One thing though is that we don't have a very long history and not enough bull/bear cycles to compare. The developed world does and the average p/es there are dramatically low.
admin
· 12 months ago
@Deepak - Yes I did use historical NSE data, but wasn't aware that it was flawed (thanks for pointing this out). You're right about us not having enough cycles to make comparisons. Its interesting that the Sensex data shows PEs of around 10. When did this happen?
If you look at my more recent article, http://www.moneyvidya.com/blog/is-the-stock-mar... I learned from a Morgan Stanley research report that in the last couple of bear markets, Sensex PE went down to lows of 13.6 (September 21, 2001) and 15.1 (December 5, 1996).
I understand that there are examples in the developed world where PEs must have fallen to drastically low levels. Is it fair, however to compare developed economies' PE lows to developing economies' PEs? Surely the mean PE for developing economies should be higher, given higher growth rates of national income?
Deepak Shenoy
· 11 months ago
The current P/E of sensex (from the BSE site) is 11.34 - as of Nov 21. 20th was even lower - 10.72. The Sensex is highly dependent on RIL, whose P/E is now around less than 10, because of an EPS of around 125 TTM. That's also skewed because it contains the one time RPL stake sale which was around 25 Rs. in the EPS. But the Sensex does not remove one-timers.
A developing economy will get hurt even more than a developed economy in a global recession - regardless of how good local economics is. That's because money flies to safety (i.e. developed economy debt) and exports suffer tremendously from lower demand. This time it's a lot worse, i.e. we have a real estate bust and a dramatically big recession worldwide.
PEs may eventually widen because of dropping earnings, for a while. Then when the recovery happens, risk doesn't get embraced - so pe's contract before picking up. These cycles can take years, and I think India will take at least three years before recovery begins, more like five. Meanwhile I wouldn't be surprised to see a further 40% drop on the Nifty, complete lack of retail interest in the markets, and very very low volumes.
All Comments
GIven that US S&P 500 earnings estimates for $2009 aer down from $100 earlier this year to like $50 today I think we're quite capable of going down about 10% in earnings. What do you think?
Its a little early to call but my feeling is that the technical rally that saw us climbing up from our low came to an end last night. As I write this comment the Nifty is already down almost a 100 points. If I see that the Nifty begins testing 2500 again I would slowly start accumulating, despite the downside risk on EPS.
One thing though is that we don't have a very long history and not enough bull/bear cycles to compare. The developed world does and the average p/es there are dramatically low.
If you look at my more recent article, http://www.moneyvidya.com/blog/is-the-stock-mar... I learned from a Morgan Stanley research report that in the last couple of bear markets, Sensex PE went down to lows of 13.6 (September 21, 2001) and 15.1 (December 5, 1996).
I understand that there are examples in the developed world where PEs must have fallen to drastically low levels. Is it fair, however to compare developed economies' PE lows to developing economies' PEs? Surely the mean PE for developing economies should be higher, given higher growth rates of national income?
A developing economy will get hurt even more than a developed economy in a global recession - regardless of how good local economics is. That's because money flies to safety (i.e. developed economy debt) and exports suffer tremendously from lower demand. This time it's a lot worse, i.e. we have a real estate bust and a dramatically big recession worldwide.
PEs may eventually widen because of dropping earnings, for a while. Then when the recovery happens, risk doesn't get embraced - so pe's contract before picking up. These cycles can take years, and I think India will take at least three years before recovery begins, more like five. Meanwhile I wouldn't be surprised to see a further 40% drop on the Nifty, complete lack of retail interest in the markets, and very very low volumes.