In recent days there have been much debate that market valuations are rising and some doomsayers are even predicting a 50%  crash in stocks worldwide. So is it only a matter of time stocks come crashing down or is it really different this time?In this post I present my views on this topic.

Averages Valuations

Using historical data, we can calculate average of  historical valuations and compare current valuations to the averages to get a relative perspective.

Some stats- The Nifty hit an all time high P/E of 28 in early 2008 when the markets peaked out before the crash. When the Nifty bottomed out around 2200, it had a trailing P/E of around 11. I also calculated the average of 10 years of data, using which i got the average Nifty P/E to be around 20. The current Nifty P/E is close to 24X.

So will we fall now??

It is incorrect to believe that the index will be at  mean valuations all the time. When the index was trading below the mean valuations, most people hated stocks when Nifty was b/w 4500 to 6500 from 2012 to 2014.  Hardly any of  the peeps who find the markets expensive currently would have dared to venture out and buy 3 years ago. For most of the 5 years under UPA 2, the benchmark indices were trading under mean valuations and nobody cared. But now that valuations are high and indices hit all time highs in 2014 and 2015 and seem all set to do it again this year, the missed out crowd keeps raising valuations concerns. Just because a lot of people missed out yet again, doesn’t mean the markets should oblige by falling. There doesn’t seem to be any reason looking on charts and also because of  improving fundamentals, growth pickup and revival of corporate earnings.

But why should one buy ‘expensive’ stocks that have already run up?

Ideally, the stock prices should reflect the growth in business, so as the underlying business stays strong and keeps growing the stock price should continue to go higher. Buying at high valuations may lead to  stock price appreciation that is lesser than profit growth of the company and vice versa.For example,  I continue to hold a few high growth stocks of companies that are growing at 50-60%  CAGR but after sharp run up in prices, projected returns from current levels are far lower at about 30-40% for next few yrs.  But isn’t 30-40% annualized tax exempt return for next 5-10 yrs  awesome too?? However it requires a lot of time and effort to find great stocks.  So the ones whining about valuations would be better off if they focus their efforts elsewhere.

Fundamental View-

With lots of laggards getting booted out of the Nifty, it is natural that the earnings growth of the index picks up speed.  Currently i am working with an assumption of Nifty EPS hitting 500 for FY18, which translates into a lowly 8% CAGR EPS growth for the 4 year period from FY14-18. So even if my tgt of 11000 gets hit next year, valuations will be reasonable and not in a bubble territory  as many would like to believe.

Technical View-

 Nifty continues to be in a strong uptrend on weekly charts. Nifty has risen 1900 points from the Feb lows.I had predicted a minimum of 4000 point rally from the lows in my tweets and earlier blog as early as March of this year resulting in an approximate target of 11000 for the Nifty for 2017. I continue to maintain my view that for Indian stocks-