The markets are making new lows (almost) everyday. The drop is making players worried and scared. The pessimism with India's growth story, Rupee fall, lack of policy measures, fiscal indiscipline, global problems etc etc are some of the reasons that are being given.
However, there are some who believe All Negativity is Priced In now. They say the markets are cheap now. Why are they saying this?
Simple. Because, Sensex and Nifty have fallen about 25% this year. Most mid & small caps have fallen more. Right?
Mungerism in me shouts Anchoring Bias, Recency Bias, Availability Bias, First Conclusion Bias, Reason Respecting, Representativeness Bias, Envy, Vividity. (The above reason of 25% YTD drop is kinda similar to a story from Akbar- Birbal times. Akbar drew a line and asked everyone to make it shorter without doing anything to that line. Birbal came ahead and drew a bigger line near the original line.)
So, what is actually true? Do we have a 'Sale at a discount' on Indian Wall Street or not?
As on date, Price- Earnings Ratio of BSE- Sensex is 16.5 and Nifty is 16.8. Is that cheap?
Reverse-engineering Gorden constant growth model [P= E*(1+g)/ (k-g)], we get g = 4%.
Using Ben Graham's PE model [P/E= 8.5 + 2*g], we also get g=4%.
So, at current prices, Mr. Market is predicting BSE-30 and NSE-50 companies to grow at 4% per annum every year till infinity.
Is that a discount?
I think, Yes. For a country growing at more than 6% every year for the past decade and expected to do the same in the foreseeable future, paying for 4% growth till eternity is not costly.
Will the discount increase?
Who knows!!!!
However, there are some who believe All Negativity is Priced In now. They say the markets are cheap now. Why are they saying this?
Simple. Because, Sensex and Nifty have fallen about 25% this year. Most mid & small caps have fallen more. Right?
Mungerism in me shouts Anchoring Bias, Recency Bias, Availability Bias, First Conclusion Bias, Reason Respecting, Representativeness Bias, Envy, Vividity. (The above reason of 25% YTD drop is kinda similar to a story from Akbar- Birbal times. Akbar drew a line and asked everyone to make it shorter without doing anything to that line. Birbal came ahead and drew a bigger line near the original line.)
So, what is actually true? Do we have a 'Sale at a discount' on Indian Wall Street or not?
As on date, Price- Earnings Ratio of BSE- Sensex is 16.5 and Nifty is 16.8. Is that cheap?
Reverse-engineering Gorden constant growth model [P= E*(1+g)/ (k-g)], we get g = 4%.
Using Ben Graham's PE model [P/E= 8.5 + 2*g], we also get g=4%.
So, at current prices, Mr. Market is predicting BSE-30 and NSE-50 companies to grow at 4% per annum every year till infinity.
Is that a discount?
I think, Yes. For a country growing at more than 6% every year for the past decade and expected to do the same in the foreseeable future, paying for 4% growth till eternity is not costly.
Will the discount increase?
Who knows!!!!
Short and Neat Article.i liked your reverse engineering. Munger has said Invert , Invert , Invert .Keep the lucid work !
ReplyDeleteThnx Sagar..
ReplyDeleteNo.
ReplyDeleteThe Market is saying that the price rise in 2010 / early 2011 is abominable and is correcting
The Market is also saying that in the next two years some sectors of the economy will grow @ 4% or even lower ..some may de grow (metals for example)
Subuji...
ReplyDeleteYes correction. But isn't it over-correction?
Some sectors may grow less (de grow also), but still overall NSE-50 growth is expected at 4%.