Are the Indian Stock Markets Overvalued? 4 Share Market Valuation Metrics Every Investor Should Know

The Indian stock markets are at an all-time high. Most of us have this question whether the NIFTY or SENSEX are undervalued or overvalued? In this video, ETMONEY's Shankar Nath explains the most popular stock market indicators that help you understand if the stock markets are undervalued or overvalued and what can action can you take.

What's covered in this video:
00:00 Introduction
00:36 The Indian Stock Market & Economy
02:12 Price Earning Ratio
05:52 Shiller Price Earning Ratio
07:51 Market Cap to GDP Ratio
09:51 BEER Ratio
11:25 ETMONEY Opinion

India's GDP growth rate has been dipping over the last many quarters. Further the onset of the coronavirus pandemic further accelerated the degrowth and the Indian GDP went into negative territory in the first and second quarter of FY2021.

Surprisingly, the NIFTY has reached an all-time high in spite of the economy delivering negative growth. A number of reasons have been put forward in support of these stock market highs which include buying by foreign institutions, low-interest rates, higher liquidity, US elections, higher GST collections, positive tweets from politicians, etc.

Let's look at some key economic and stock market indicators that will help us evaluation the level of overvaluation and undervaluation that we currently are in.

👉 Indicator 1 : PRICE EARNING RATIO

The price-to-earning or the PE Ratio is a very popular valuation metric and helps you understand if the price you are paying when purchasing an asset or receiving when selling an asset is too much or too little.

The Trailing P/E is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months. And the forward P/E ratio estimates a company's likely earnings per share for the next 12 months. The primary difference between the two ratios is that the trailing P/E is based on actual performance statistics while the forward P/E is based on performance estimates.

A combination of the trailing and forward PE Ratios can be a good indicator of whether and by how much are the equity markets over or undervalued.

For more information on PE Ratios, do watch our video on the same at: https://www.youtube.com/watch?v=cGvd3e9mF_k

👉 Indicator 2 : SHILLER'S PRICE EARNING RATIO

The Cyclically Adjusted Price Earning ratio is also called the Shiller Price Earning Ratio. Simply speaking, the Shiller PE Ratio is a PE Ratio that is adjusted for business cycles and inflation.

The Shiller's PE Ratio is calculated by dividing the price by the average earnings over the past ten years with adjustments made for inflation. This ensures that periods of excessive or tepid earnings are normalized and we have a smooth earnings denominator to work with.

The Shiller PE Ratio is definitely an improvement over the simpler PE Ratio and gives a good long term direction to your over and undervaluation analysis.

👉 Indicator 3 : MARKET CAP-TO-GDP RATIO

The market cap-to-GDP ratio is also called the Warren Buffett indicator and is often cited by Buffett as one of his primary directional tools to understand if the stock market of a country is cheap or expensive. It is a very high-level metric and is calculated by taking the value of all publicly traded stocks in a country and dividing it by the nominal GDP of the country.

👉 Indicator 4 : BEER RATIO

BEER is an acronym for Bond Equity Earning Yield Ratio. This ratio is a simple comparison between the bond yields with the stock market earnings yield. The BEER with trailing or forward ratios is a good indicator to determine the state of valuation of the stock markets

👉 ETMONEY OPINION

There is often a lot of noise when the stock markets are undervalued or when they are overvalued. The best thing one can do is to keep your ear trained on understanding the impact on the real economy and on more important things like sales, revenue, operating income, margins, leverage, cash flows, and profits.

Now, all the indicators discussed in this video seems to suggest that the Indian stock markets are overvalued. So here are 5 techniques you can employ at times of overvaluation:
1. Avoid lump sum investments in equity funds
2. Partially book some profits which ensures that you have taken advantage of the present rally
3. Use tax harvesting to reduce your taxes (watch video on tax harvesting here: https://www.youtube.com/watch?v=t_y0kNP-apY)
4. Make sure that you follow disciplined asset allocation in case you have not done that yet
5. Do a rebalancing exercise which does a brilliant job of improving your risk-adjusted returns.

#ETMONEY #StockMarkets #NIFTY #SENSEX

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Видео Are the Indian Stock Markets Overvalued? 4 Share Market Valuation Metrics Every Investor Should Know канала ETMONEY