Why I Think The Indian Stock Market Is Expensive

I think the Indian stock market is currently expensive.

The current Nifty P/E is 22.67.

1. Prof. Sanjay Bakshi wrote an article in 2009. It may be wise to revisit that. He said when the Nifty P/E went beyond 22, the subsequent 3 year returns were on average -14.98%. So you would be wise in listening to more experienced people in the markets and not invest significant amount of money or probably any money at these levels.

2. There were three time-periods since 1999 when the the Nifty breached this level. Let me show what happened subsequently:

Nifty PE more than 22.67

The three periods were in 1999-2002, 2007-2008 and 2009-2012. You can see that the Nifty did continue to rise from a P/E of 22.67 and on average rose by 20-25% from this level.

But the more important thing is that it fell from this peak always to a level either the same or lower over the next 3 years and the fall was 20-60%.

So what does this bode for the Nifty based on this historical trend:

  • The Nifty will rise by 20-25% from the current levels(10700 to 11200)
  • The Nifty will then fall by 20-60% from these levels(8960 to 5350)

3. So what should you do. My opinion is:

  • You can decrease your equities to 25% of your total portfolio and wait for the decline to increase your allocation.
  • If you are investing for the long-term, like 10-20 years or more, you can keep to your allocation( say 60/40 stocks/bonds or whatever) and not pay any attention to what happens interim.
  • If you are dollar cost averaging, then you can continue to do so, provided you will continue to do so even when the markets fall and your portfolio will be showing losses because you are in for the long-term.

4. The main thing is to have a plan for what you will do when the markets will fall and stick to a course that will be beneficial over the long run.

This is just my opinion. I may be wrong or right and it is up to each one to decide and act for himself.


One thought on “Why I Think The Indian Stock Market Is Expensive

  1. Sumit Agah says:

    Actually the Indian stock market is overvalued. Sensex companies are trading at a trailing p/e multiple of almost 20 times, while the long term average has been 17 times.

    Shares have got horribly expensive in the last one year. Pharma company shares are at p/e 50-60 times. Unless there is a robust growth of 50% in earnings not sure how they are going to sustain.

    Still you might want to check individual stocks before investing. I suggest you study the following link to see how shares are valued.

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