Mkt Val­u­a­tions Out­pac­ing Av­er­age

Stock mar­ket P/E ra­tio may have touched 25 by mid-July against long-run av­er­age of 18

The Economic Times - - Companies: Pursuit Of Profit - Our Bu­reau

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.

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