Investment Shastra

Nifty@MRP Suggest Markets Are Highly Overvalued, What Should Investors Do?

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 Jun ‘17, considering the free float market capitalization at the MRP of individual stocks and the share price data as of 29 September, 2017, the Nifty@MRP is at 8800 including dividends. On 29th September, NSE Nifty ETF equivalent closed at 10516.4, which is ~19% overvalued. As of 23 October, 2017, closing index value of 10184.9, Nifty is ~15% overvalued.

On similar lines, the Sensex@MRP value is at 29047. On 29th September, 2017, the Sensex closed at 31283.7, which is about 8% or 2237 points above Sensex@MRP. As of 23 October, 2017, closing index value of 32506.7, Sensex is ~11% overvalued.

Future Outlook

The markets have rallied close to 22-24% so far a 2017. Such a rally would have been good news if driven by the company’s earnings and a good economic growth. However, Indian economic growth slowed down to 5.7% in the first quarter as compared to 7.9% seen in the year ago period. The global economic growth, though inching up continues to remain weak.

Nifty earnings also declined by 8.4% YoY for the first quarter of the fiscal. Second quarter earnings have just started to come in and don’t look too good either.

So the question that remains is what is driving the stock market rally? The answer is surplus liquidity – both global and domestic. Global investors have been attracted to India thanks to the better risk-reward ratio as compared to other emerging markets. Domestic investors on the other hand have been loading up equities due to poor performance of other assets like fixed income, gold and real estate.

To give you an idea, the FIIs have invested $6.67 billion in equity markets so far in 2017, whereas DIIs have invested $7.2 billion. The equity mutual fund inflow has tripled to Rs. 80,000 Cr in the second quarter.

MoneyWorks4me Opinion

As of 23 October, 2017, the Nifty was trading at a PE ratio of 26.4x and the Sensex at 24.0x. These are just short of the all-time high of the 28x PE seen in 2000 and 2008, just before the crash that followed in both the periods.

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.

However, we continue to be cautious on our exposure to equities in the current scenario. We advise our investors to do re-balance their assets in favor of fixed income till the time market valuations seem reasonable.

Within equities, we are finding pockets of undervaluation in the IT, Healthcare, energy and utility space. The IT sector has been impacted by protectionist policies by the new US government. Investors also fear that Indian IT companies cannot keep up pace with technological shift in process. However, the companies’ valuations are attractive after factoring in the negatives. A similar situation exists in the Healthcare sector that is experiencing pricing pain in the US generic market.

As always we advise investors to buy fundamentally sound stocks at a good margin of safety. Markets may or may not correct. What we can be assured of is that every now and then market will give us an opportunity to buy a quality stock at a cheap price.

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A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.

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