"You can fool some of the people all the times, but you can not fool all of the people all the times".
Stock markets have one metric, which everyone agrees on, is the thermometer for them - PE ratio. Though I personally dont agree with this (i prefer EV/EBIDTA, sum of parts, as they capture interest of all the stakeholders in the ecosystem), but there are some hard proofs
(https://craytheon.com/charts/nifty_pe_ratio_pb_value_dividend_yield_chart.php)
This link states, we are at PE of 24.5
Some of these estimates point that any long term investor will loose 30% of their portfolio in long term, if they invest now in Stock market.
Simply the market is stupid. Everyone knows that we are in stupid territory of the market. But how long, we will be here ?? This is the biggest question and its answer lies in following factors
We are again stuck on the question - How long??
Fundamentally, the DCF of dividends should have been the value of the underlying security. But this strategy might be good for US but not so for India due to the following reasons
1. High DDT (around 17% div dist tax)
2. Very less avenues for pass-through (such as REIT and Yieldcos in US)
3. Very high taxation in India - Due to high taxation, people- both shareholders and the promoters, want to hide - white income (though it is similar in US, but its perception, that US Govt. is good manager, while Indian Govt. is like a corrupt manager, so India charges too high for tax)
Now, consider the alternatives for investors
1. FD - lower interests day by day
2. Bond Market - Underdeveloped
OK, let's do the comparisons now
PE of FD of say 8% = 100/8 = 12
PE (avg long term, stock market) = 14
PE (Currently secured bonds of good rated companies) = 7-8%
PE (current market) = 25
Booms are brought by retail investors and the bursts are bought by the institutional investors. Sure, institutional investors are clever enough, they ride the boom and profit from it and then they say at one point of time that markets are about to loose steam and they will say, lets park our cash (FII will do so in US treasuries, once they increase interest rates)
One very good alternative, which is evolving is NCD of relatively secure companies.
PE of Corporate Bonds = 100/11 = 9 (say ..decently secure.... Muthoot N6 unsecured NCD ). The institutional investors are going to park their money in these NCD's and wait for the market to collapse on its own weight. NCD and term papers will take atleast 6 months to develop, till then market may remain stupid or may be even more stupid.
From here, the market, can go upto say PE=28, as there is no negative sentiment in the market till now, but if the balloon swells to PE=30, then it is going to burst for sure. For the moment wait for PE=21-22, and then invest again till market again go to PE=24-25. Keep on investing and exiting in this narrow range, till it goes beyond PE=25, and at that moment, switch off the trade account and shift everything to FD/NCDs. But beware of NCDs of the NBFC's especially the one in real estate or with any kind of link to real estate or long gestation equipment finance such as DHFL, Indiabulls, SREI as they might have lot of hidden transactions. Beware of Infra/Housing (not low cost housing) - lot of aggression and chances are people are making mistakes in biddings.
It will somewhere around March 2017, that market will loose steam as institutional investors, will stop buying shares at sky high valuations, which have already been deserted by the long term investors like me
Wait for March 2017 and merry profits till then!
Stock markets have one metric, which everyone agrees on, is the thermometer for them - PE ratio. Though I personally dont agree with this (i prefer EV/EBIDTA, sum of parts, as they capture interest of all the stakeholders in the ecosystem), but there are some hard proofs
(https://craytheon.com/charts/nifty_pe_ratio_pb_value_dividend_yield_chart.php)
This link states, we are at PE of 24.5
Some of these estimates point that any long term investor will loose 30% of their portfolio in long term, if they invest now in Stock market.
Simply the market is stupid. Everyone knows that we are in stupid territory of the market. But how long, we will be here ?? This is the biggest question and its answer lies in following factors
- Alternative Investment Channels
- Real Estate - will remain in doldrums due to peak valuations
- Lending - Black money has been curtailed, so returns limited here
- Interest rates - Historic low
- Growth Estimate of the underlying economy - Decent atleast for India due to Modi and the Monsoon is the topping on the cake
- Global factors - This is the only factor, which is really complex to analyse
Any predictions will be futile, without having decent estimate of each and every factor. But with the assumptions that there will not be any adverse global scenario - Markets will remain stupid for some more time.
We are again stuck on the question - How long??
Fundamentally, the DCF of dividends should have been the value of the underlying security. But this strategy might be good for US but not so for India due to the following reasons
1. High DDT (around 17% div dist tax)
2. Very less avenues for pass-through (such as REIT and Yieldcos in US)
3. Very high taxation in India - Due to high taxation, people- both shareholders and the promoters, want to hide - white income (though it is similar in US, but its perception, that US Govt. is good manager, while Indian Govt. is like a corrupt manager, so India charges too high for tax)
Now, consider the alternatives for investors
1. FD - lower interests day by day
2. Bond Market - Underdeveloped
OK, let's do the comparisons now
PE of FD of say 8% = 100/8 = 12
PE (avg long term, stock market) = 14
PE (Currently secured bonds of good rated companies) = 7-8%
PE (current market) = 25
Booms are brought by retail investors and the bursts are bought by the institutional investors. Sure, institutional investors are clever enough, they ride the boom and profit from it and then they say at one point of time that markets are about to loose steam and they will say, lets park our cash (FII will do so in US treasuries, once they increase interest rates)
One very good alternative, which is evolving is NCD of relatively secure companies.
PE of Corporate Bonds = 100/11 = 9 (say ..decently secure.... Muthoot N6 unsecured NCD ). The institutional investors are going to park their money in these NCD's and wait for the market to collapse on its own weight. NCD and term papers will take atleast 6 months to develop, till then market may remain stupid or may be even more stupid.
From here, the market, can go upto say PE=28, as there is no negative sentiment in the market till now, but if the balloon swells to PE=30, then it is going to burst for sure. For the moment wait for PE=21-22, and then invest again till market again go to PE=24-25. Keep on investing and exiting in this narrow range, till it goes beyond PE=25, and at that moment, switch off the trade account and shift everything to FD/NCDs. But beware of NCDs of the NBFC's especially the one in real estate or with any kind of link to real estate or long gestation equipment finance such as DHFL, Indiabulls, SREI as they might have lot of hidden transactions. Beware of Infra/Housing (not low cost housing) - lot of aggression and chances are people are making mistakes in biddings.
It will somewhere around March 2017, that market will loose steam as institutional investors, will stop buying shares at sky high valuations, which have already been deserted by the long term investors like me
Wait for March 2017 and merry profits till then!
