How expensive are stocks, on a scale of 1 – 10?

When people talk of falling stock prices, this is where they go wrong

– How much has a stock fallen has nothing to do with whether it is available cheap or not.

Unfortunately, human memory is short and markets are usually made up of a lot of first time investors. These are people who want to average stock prices at a 5% fall and buy more at a 5% rise. Then there are gullible investors who believe IN all sorts of market experts and advisors.

Some renowned financial advisors will soon be awarded a lifetime achievement award in constantly finding these new and gullible investors.

Why is it that advisors who understand the markets super well, end up misguiding clients?

The reason is simple. It is easier to convince people about something that they really want to believe, than to convince them about what has never crossed their mind. It is all about using a preconditioned mind.  

In rising markets, people hear all sorts of stories about how quickly their friends made wealth. These stories are mostly true. Unfortunately, people end up thinking about these avenues of wealth creation when these stories have already played out, and hence miss out the story which is yet to play out.

Valuation Study

I remember the year 2012, where Nifty PE was around 15-16 and there were no investors in the market. No one wanted to touch stocks. Today at PE valuation of 28, things are very different. A fall from 28 to 26 makes markets look really cheap.

We are in a market which will see both time correction and price correction and let no body tell you otherwise. Here’s what time correction really means, look at these charts:

Nifty indices valuation

Now keep in mind that 10 year average for the Indices itself has gone up given how expensive markets have been over the past 2-3 years. This needs to correct….. and even if it does not, we are in very expensive markets.

On 23rd May 2019, the Sensex hit its all-time high with the index hitting an intraday high of 40,124 level and Nifty crossed 12,000 levels touching an intraday high of 12,041. On that day, the PE ratio of Sensex stood at 28.35 and Nifty stood at 29.02.

The Nifty PE further soared to 29.9 on 3rd June 2019, its highest ever. At these valuations, markets are extremely expensive and such levels are unsustainable given the earnings reported by the constituent companies of Nifty.

Going by technical analysts, there is some merit in believing that there will be a 5th impulsive wave which will start soon and take the Nifty all the way to its lifetime high in the next 3-6 months. Much as I don’t place bets on technicals, in past these things have played out and if that happens again, markets will be overvalued more than ever.

Also Read – Nifty PE Ratio as an Indicator of Stock Market Valuation

3 month Nifty Valuation

Recent correction in the stock market was for most part on account of valuation. Of course, the budget and governement policies did play a part but anyone who has followed the market for long enough will tell you that markets and such things have little relation to each other. Markets are cyclical by nature. Period.

Historically high PE levels (above 28) have led to steep corrections in the markets. High PE ratio occurs when stock prices rise at a faster pace than earnings .

Nifty 50 Companies Valuation After Correction

Key Sectors like BFSI, Auto, IT and Oil & Gas have witnessed considerable correction both in price and valuation multiple.


(The above table is based on full year EPS for FY 2019)

View: While markets may have corrected a little, they are nowhere close to being cheap. In fact, they remain very expensive. Mid cap stocks have corrected more but were also more expensive. I do expect a sharp bounce in the market but certainly not the market where you should go out and buy aggresively. On the contrary, not stocks, but a combination of right fixed income and structured products will make the highest returns. 

On a scale of 1 – 10, Id rate this 9.