Nifty Index at 5690 is Equal to 4905

The look back continued....!

The last regular update of The Ultimate Momentum Signal was published on 23rd August 2011 before the stoppage. The data included in that update was for the trading day - 22nd August 2011. If we go back to those days, it is seen that the Nifty index was breaking down from the previous support of 5250 - 5300 levels at that time. Nifty index closed at 4905 as on 22nd August 2011.

Now, let me reproduce the Nifty trailing fundamentals data from that old update. 

 Nifty Trailing Fundamentals  

"The trailing Price Earnings Ratio  ( PE Ratio ), Price to Book Value ( PB Ratio ) and Dividend Yield ( DY Ratio ) of the Nifty Index  were at 17.68, 2.89 and 1.55 respectively as on 22nd August 2011."

And this is what this author opined in the post dated 19th August 2011 about the then Nifty trailing fundamentals.

"This blog had repeated time and again that Nifty valuations were stretched, and now, it seems that market is in the process of clipping the same. As the market has been pricey for a very long stretch of time and most market participants became used to the higher valuations, the present correction may appear to be very deep. However, it remains to be said that the trailing valuations have just fallen to the long term averages now. It is a very simple matter that the long term averages are supposed to be somewhere in the middle of the valuation ranges and therefore, at least for half the period used to calculate the averages, the index valuation have remained below the long term averages. Therefore, there is no such near limit at which the fall may get arrested. But, it is a fact that market has become comparatively safer for long term investors for they can buy at somewhat reasonable prices from now on and this itself may provide a bit of margin of safety and long term upside."  

Now, let me show the present data related to the trailing valuation of the the Nifty index. Here it is!

It doesn't need much effort or analysis to see that the the present day trailing fundamentals of Nifty index, which closed at 5690 as on 28th March 2013, is more or less equal to that of Nifty at 4905 in August 2011.

Now you know reason behind the seemingly absurd claim in the headline of this post; "Nifty Index at 5690 is Equal to 4905"! And this is why, despite the tall claims of impending heavy falls by some analysts, the index isn't going anywhere now a days. But this doesn't mean that the index will not fall further. But any steep falls from these levels will be good opportunities for the long term investors to add the index to their portfolios. 

To know about the long term valuations of the Nifty index please read Nifty Fundas.  

Cheers and Prosperous Investing!!!  

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information and educational purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy. We do not recommend, promote, endorse or offer any guarantee whatsoever in respect of any services or products offered in the advertisements displayed on the site by Google AdSense.

Nifty Fundamentals Revisited

The Market isn't Galloping Away, Why ? 

Indian stock market seems to be in the threshold of a correction after going through a strong rally. This rally   raised the stock prices to very expensive levels on the back of  the relentless FII buying helped by the cheap overseas money and a rising Rupee. On a point to point basis, both the major stock indices, Nifty and BSE Sensex have not been able to surpass their intraday highs of January, 2008 in the recent rally. This post attempts  to take a look at the reasons for the non-performance of the stock market  in the entire past three years from the point of view of the trailing fundamental valuations. 

Indian Stock Indices - All Time Highs

The above table shows the all time highs of Nifty futures, Nifty Index and BSE Sensex during the period. The table shows that new closing highs were achieved during the recent rally. Now, let's make a comparison of the trailing fundamental valuations of the S&P CNX Nifty Index at these market tops.

Nifty Index - Trailing Valuation Comparison 

A View to the Nifty Fundamentals ... !

  Does Inflation Affect the Nifty Valuations ... ???

The return of galloping inflation isn't  news anymore ! It's been here with us for the last year or so. Last week, the RBI too felt that inflation needs to be controlled after being fallen behind the curve in inflation targeting. ( Click here to read this blog's take on the last week's RBI action ). And the Opposition parties too got the price rise  weapon to attack the government. Some analysts are even projecting a further rise of 100 basis points in the repo and reverse repo rates in the current financial year.

As a consequence of the RBI action, the interest rates in the economy will rise. Now the question is whether rising inflation is capable of affecting the Nifty valuations ? A Google search reveals a scholarly paper by  Steven A. Sharpe,  which says : " a rise in expected inflation coincides with both (i) lower expected real earnings growth and (ii) higher required real returns."

Now let's translate this to our kind of simple language. Let's start with the word 'real' from the above quote. Last week this author commented that if one year deposit rates are yielding less than the inflation rate, the 'real' interest is actually negative. Say a deposit earns  8 % and the inflation as per the whole sale price is 15 %. The depositor makes the deposit by postponing a buying decision which can be executed at a price of 100 rupees at present. She gets 108 rupees at the end of one year, whereas her purchase then  requires her to spend rupees 115. It seems that  she has made a loss of rupees 7 by making the deposit. This loss is called negative real interest. Now what could be the real interest ? Real Interest  = Actual Interest - Inflation. And it is supposed to be on the positive side.

Now even if the Nifty companies could register a profit growth of 25 % for the current financial year, how much of that profit growth is 'real' if we assume a 15 % inflation rate ? 25% growth minus  15 % inflation leaves  a  'real' profit growth of 10 % only. We have already explained the first part of the quote. Inflation affects not only the depositors but also the stock investors.

Now how can we explain the second part of the quote which talks about  "higher required real returns". The answer is simple. How can we increase the returns of an investment in stocks ? Buy at much  lower prices than the prevailing prices. How is it possible ? Simple ! Since the prevailing prices are higher and do not give adequate real returns, it should fall.

A View to the Nifty Price Earnings Ratio

The NSE website says that the Nifty index has closed at a Price Earning multiple of 22.91 as on 2nd August, 2010. Here is a snapshot of the page !

 

What does a Price Earning ( P/E Ratio ) multiple mean. It means that the Nifty price is 22.91 times the Nifty earnings. We know the Nifty price. It closed at 5431.65. If this closing price is 22.91 times earnings,  how much is the Nifty earnings. 5431.65/ 22.91 is Rs 237.  

The beauty of the PE ratio is that it helps us to find out the rate of return (  i.e. earnings )  of the Nifty or any stock in comparison to the asking price just like we calculate the interest. Therefore, the current rate of return of Nifty is 4.36 %. ( 237/5431.65*100 = 4.36 % ).

However, there is also a short cut available to the above calculation. The current rate of return of the index or stock can also be calculated by dividing 100 directly by the PE Ratio. Now lets do the calculation : 100 / 22.91 =  4.36 %.

The pertinent question now is... does it make sense to buy Nifty at a current yield of 4.36 % when the inflation is reaching the lower double digit levels ?

Here are the parting words : Enjoy the rally till it lasts ! Growth chasers ( read FIIs ) enabled  by the extended loose money policies of the outside world may stretch the rally too. But stock prices are not cheap. Let the buyers beware !!

Additional Disclosure : The author is neither an expert nor an economist. This article is based on pure common sense. The author takes the responsibility of any mistakes in the analysis too, on the condition that this article shall not be considered as investment advise. 

Click here to read an article on historical valuations of the Nifty Index.


© 2010, momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

Nifty Fundamentals Revisited .. !

 What's The Nifty Funda Now ... ?

Here is a followup on the Nifty Fundamental Analysis for the first half of the calender year.  Some of the  readers might be aware of the article on Nifty long term historical fundamentals  published on this blog. That analysis which covered the entire period of eleven years for which the fundamental data was available, can be read  by clicking here.

To make the story short, that analysis lead to the making of a common sense guide to Nifty historical fundamentals and the same is reproduced below. But before going full force in to the analysis for the current period, a few words on the earlier analysis. Our common sense guide to the Nifty valuation is one of the most powerful tools long term investors can use in the Indian market. Think about an investor who invests for the long term in an index fund or an exchange traded fund ( ETF ) like Nifty Bees.  Our typical investor invests only when Nifty is available below the long term valuation averages. Without any doubt, this investor will be a sure winner than the other "normal investors" who  are attracted to the stock market only when the valuations are rich and speculation is wild. This is because our typical investor buys only when prices are low and she has margin of safety and time on her on side to be a winner. Unlike momentum traders who exits the market at the first sign of trouble, long term investors need to consider valuations with utmost care, because any investments made at higher valuations requires much more longer periods to become profitable. Further, such investments limit the power of long term compounding which is the real enabler of wealth creation.

S&P Nifty Valuation Guide

Now, let us check out the Nifty fundamentals for the last six months. As before,  this analysis is done  from the perspectives of historical  Price Earnings Ratio,   Price to Book Value Ratio and the Dividend Yield.

Nifty  Historical Price Earning Ratio

The Nifty PE Ratio oscillated in a tight range between a high of 23.59 and  a low of 20.06 during the review  period. As you can see from the Valuation Guide, the valuations remained between the moderately high to the very high valuations in the six months period. The PE Ratio achieved it's high of 23.59 on 6th Jan, 2010 with a corresponding close of Nifty at 5282. It recorded the low of 20.06 on 25th May,2010 with a corresponding value of 4807 for the Nifty index.

Readers may also note that the PE Ratio is moving in a slightly downward trajectory due to increase in company profits, the denominator of the PE Ratio. ( For more details see the comparative chart of Nifty index and PE Ratio towards the end the article ).

Nifty Historical Price to Book Value Ratio

The Price to Book Value Ratio too moved in narrow range of 3.32 to 3.82 during first half. However, the trajectory of the PB Ratio seemed to be flat in the last six months.

Nifty Historical Dividend Yield   

As Dividend Yield increases when stock prices fall, the yield moves opposite to the other two fundamental  parameters of  PE and PB ratios. The DY too moved in a narrow range of 0.91 to 1.05 % during the review period. 

The important high and low points of Nifty and corresponding fundamental data recorded for the review period are highlighted in the following table.

Nifty Fundamental Highlights -   Jan. - June, 2010 

The High, Low and Average of Nifty and  it's various valuation ratios for first half of the year are shown in the following table.

The High, Low & Average of Nifty Fundamentals  -  Jan. - June, 2010 

The average values of Nifty, PE, PB and DY ratios during the period were 5119, 21.86, 3.62 and 0.96 respectively helping us to conclude that the Nifty index has mostly traded  in the high valuation range. 

Comparison Chart of Nifty Index & PE Ratio

As already stated elsewhere, the PE ratio has decreased nominally while Nifty has gained nominally during the first half of the calender year. Unlike the previous year, no great bargain prices were available in this year. Long term investors may wait before making substantial investments in the equity markets. They may enter at lower valuations as the post bear market economic recovery  seems to be faltering the world over and it may  lead to lower valuation entries when risk perceptions rise. However the Indian economy seems to be in the right trajectory, at least for now.

In case readers may require the Nifty fundamentals on a day to day basis, the data is available at the NSE website  following the path Home > Indices > Statisics >  P/E, P/B & Div. Yield values.     

Cheers and Prosperous Long Term Investing  !!! 
   

© 2010,  momentumsignal.blogspot.com  All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

A Comment on The S&P Nifty Valuations.

 What does the common sense analysis say...?

The S&P Nifty index consists of fifty big companies from various industries. An index like the Nifty can also be analyzed just like a company on the basis of it's fundamentals. Since the prediction of the index fundamentals  are beyond the scope of this blog, let's stick with the published historical data available from the NSE website on a daily basis.

( May be this is like trying to drive a car by looking on the rear view mirror..! ). 

Today, S&P Nifty closed at 5250 and the historical Price Earnings Ratio ( PER ), Price to Book Value Ratio ( PBV ) and the Dividend Yield Ratio ( DV ) are at 22.32, 3.69 and 0.94 respectively. These ratios were at 23.59, 3.72 and 0.93 respectively on the 6th of January 2010 when the Index touched the post bear market high. In order to make the head and tail of these data points let us refer to our common sense guide to the Nifty historical valuations. The following table is a reproduction from the Nifty Fundas page accessible from this blog's home page. 

Common Sense Guide to the Nifty Historical Fundamentals

According to the common sense guide,  the PER of 22.32 is in the High Valuation range while the PBV of 3.69 is somewhere between the long term average and high valuations. However, the DY of 0.94 is already in the very high valuation range. On speculating about the reason for these anomalies, we may come to the conclusion that the India Inc is still in the mode of conserving and raising cash and hence the low DY and the comparatively low PBV. Now the question is whether the India INC. can deliver a growth of  profits which is above 25 %. The current valuation seems to be justified only by a minimum growth in profits of 25 % in the coming year.

For more information on the common sense analysis of Nifty long term historical valuations, please read Nifty Fundas.

Happy Investing and Trading!!!

You can read the Info on the Ultimate Momentum Signal from here.

You can also checkout the five year history of The Momentum Signal Spreadsheet from here.



© 2010, momentumsignal.blogspot.com All rights reserved.


Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.

The Ultimate Fundamental Analysis - S&P Nifty

One may wonder why a blog, which claims to be the source of The Ultimate Momentum Signal (based on technical analysis) is now talking about The Ultimate Fundamental Analysis of S&P Nifty Index.

The reasons are:

• History repeats itself, even though participants, sectors, investing styles, fashions, fads etc may change in each bull / bear markets.
• There will always be analysts, especially the TV variety, who will always say 'this time it's different.'
• It's always better to have a meaningful understanding of the market from another perspective.
• It may help us to make an intelligent guess about the different phases through which each bull/bear market may pass through and the present phase of the market from the fundamental perspective.

Now let us check out the Nifty from the perspectives of historical  Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield. The data for this analysis is available for the past eleven years only.

Nifty  Historical Price Earning Ratio