Mkt Valuations Outpacing Average
Stock market P/E ratio may have touched 25 by mid-July against long-run average of 18
Mumbai: Stock market valuations are substantially greater than the long-run average and not far from the frothy levels of 2007, said the government’s mid-year Economic Survey.
The price-earnings (P/E) ratio—a widely watched valuation measure—of the Indian stock market reached a level of 23 in May and is estimated to have touched 25 by mid-July against long-run average of 18.
“It is well known from the finance literature that a key condition for sustaining unusually high P/E levels is for future economic and, especially profit, growth to be rapid, and/or for investors to be willing to accept a lower return for holding stocks over other less risky assets (the so-called equity risk premium),” said the Survey released on Friday.
“Failing these, there is a strong tendency for mean reversion all over the world, illustrated for India in the aftermath of the boom of the mid-2000s,” it said. The Sensex gained 16.9% and the Nifty rose 18.6% in the financial year ending March 31, as against losses in 2015-16. During the year, foreign investors pumped .₹ 59,900 crore into Indian equities, while domestic institutions, including insurance companies and mutual funds, net bought shares worth .₹ 53,500 crore.
“Historical evidence suggests that there is mean reversion towards more realistic valuations, especially when global excess liquidity is driving high valuation in the first place,” the Survey said.