Investment Shastra

Nifty@MRP suggests that markets are slightly overvalued

What is Nifty@MRP?

As investors, we constantly track the Nifty movements. To make investing more profitable and not a game of mere chance, we need a solution, a solution which could help us identify whether the market is grossly depressed or irrationally exuberant. This is exactly what Nifty @ MRP is for!

What is the latest value of Nifty@MRP?

For Q4 2018, considering the free float market capitalization at the MRP of individual stocks as of 28th March, 2018, the Nifty@MRP is at 9643. On the day of writing 21/5/2018, Nifty closing index value is 10,516.70, which implies 9% overvaluation.

 

Future Outlook

The markets have been flat year to date 2018. Broader markets stocks like small and mid caps are undergoing correction. LTCG, rising crude oil prices, jump in bond yields and stretched valuation are some of reasons for high volatility in the market.

Earnings growth has been scattered. Autos and private retail banks have reported good earnings. Corporate banks, Pharma and Telecom have disappointed.

Nifty earnings grew by 7% YoY for the third quarter of the fiscal. The fourth quarter earnings are coming in decent backed on low base.

Last year we experienced rally in equities due to lot of consistent MF inflows. This year, FII outflow is high. FIIs have sold $2.5 Bn till date in this calendar year. While DIIs invested $6 Bn.

MoneyWorks4me Opinion

As of 21st May 2018, the Nifty was trading at a PE ratio of 26.08X and the Sensex at 24.0x.

Nifty has not moved up much in last 1 year. However, our Nifty@MRP is constantly going up due to increase in valuation of growing companies. For some years, Nifty was running well ahead of its valuation but now it looks like the gap is narrowing.

The advantage is, as this gap narrows, there will be many stocks trading at attractive prices. We will be able to buy fundamentally sound stocks to build a long term portfolio. A long term investor shouldn’t miss the opportunity to accumulate in times of correction.

Though we feel the markets are currently overvalued, we are well aware of the fact that a future market crash is no way a certainty and we cannot base our investment hypothesis on this. We continue to looking for good companies trading at reasonable valuations.

Within equities, we are finding pockets of undervaluation in the corporate banks, pharmaceuticals, telecom and utility space. Corporate banks are into last leg of their NPA cycle. As recovery from NCLT picks up, some credit costs will come down leading to rise in ROEs. Pharma is long term growth sector with temporary slowdown in drug launches. In 12-18 months, both these sectors will start performing.

We advise our investors to do re-balance their portfolio in favor of fixed income till the time market valuations seem reasonable.

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2 comments

  • thanks, Have a quick query, I am doing index investing in nifty and next 50 with my salary as SIP every month. Should I stop the sip due to current valuations and divert the inflow towards fixed income and waite?
    Please suggest.

    • Hello Sir,
      If your investment horizon in long enough (7-10 years), then it’s advisable to keep your SIP in Nifty 50 going as it offers return more than Fixed Deposit. For Nifty Next 50, for the moment the returns are lesser than Fixed Deposit so you could shift your money to fixed income from that SIP. In the meanwhile, we suggest you to keep a tab on which Index Funds (Nifty 50 and Next 50) and mutual funds are offering returns more than Fixed Deposit returns on Moneyworks4me.com

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