Taking cues from Nifty Fifty History- Tone down Expectations

Yesterday, Nifty reported PE crossed 21 for the first time in 3.5 years (last time it was at 21+ PE on 2nd May 2011). See here. 

I did some calculation on how Nifty has behaved in the past from various PE, PB and Div Yield levels (taken all data from NSE website) & here is the analysis-

PE	1yr Return	3yr CAGR	PB	1yr Return	3yr CAGR	Div Yield	1yr Return	3yr CAGR
<12	70%	39%	<2	11%	26%	>3%	82%	55%
12-15	52%	30%	2-3	35%	27%	2.5-3%	55%	43%
15-18	20%	18%	3-4	14%	13%	2-2.5%	53%	36%
18-20	8%	10%	4-5	8%	5%	1.5-2%	32%	19%
20-22	5%	6%	5-6	-3%	5%	1-1.5%	4%	7%
22-24	-7%	1%	6+	-52%	-1%	<1%	-11%	2%
24-26	-29%	-3%
26+	-34%	-9%

So, data clearly says- "Be Greedy when others are Fearful and Be Fearful when others are Greedy."

Currently, Nifty is at 21.1 PE, 3.5 PB and 1.25% div yield.

So, history says-

1) Tone down your expectations. Nifty won't run up fast from here.

2) But 1 yr and 3 yr returns are not into negative territory as yet. So, we are not into bubble territory as yet.

Though, there are early signs of bubble-

1) Small & mid caps are running up fast on (a) One good quarter results (b) Some expert's reco

2) IPOs are coming and getting huge subscription

3) Quality Consistent growers are selling at 30+ PE.

But these are early signs only. Big zero Profit IPOs are yet to come. Valuations are yet to get over-stretched.

So, according to history, Nifty Index should give close to FD kinda returns over next 3 years. 

But, some will say, it's different this time-

1) We are at the bottom of the economic cycle. Q1 GDP growth is encouraging, interest rates should go lower in some time which will give boost to ROEs and PAT growths.

2) Strong government and PM after a long long time.

So, according to me, its time to get a bit cautious; but only a bit!!!