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Old 22-02-2010, 11:27 PM
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Default Long Term Historical Fundamentals of Nifty.

The Ultimate Fundamental Analysis - S&P Nifty


One may wonder why such a long term fundamental analysis of an index like the S&P CNX Nifty on the basis of the history is necessary.

The reasons are:
  • History repeats itself, even though participants, sectors, investing styles, fashions, fads etc may change in each bull / bear markets.
  • There will always be analysts, especially the TV variety, who will always say 'this time it's different.'
  • It's always better to have a meaningful understanding of the market from another perspective.
  • It may help us to make an intelligent guess about the different phases through which each bull/bear market may pass through and the present phase of the market from the fundamental perspective.
Now let us check out the Nifty from the perspectives of historical Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield. The data for this analysis is available for the past eleven years only.

Nifty Historical Price Earning Ratio



Any casual observer of the above historical P/E chart can see that the highs are between 25 and 30 and the lows are between 10 and 15. There you are! You have just solved the Nifty fundamentals.

One more careful observation will make you understand that the above referred data points of highs and lows were actually the extreme data points and for most of the other times the highs were at 21 to 23 and the lows were at 14 to 16. ( For more information see the chart named Nifty - Extreme Valuations).

Please remember that we have till now used only simple common sense and that alone has made us far better analysts than the majority. ( After all who says that simple common sense is common! ).

Nifty Historical Price to Book Value Ratio


Let's begin our observation of the historical P/BV chart. It seems that the maximum P/BV achieved during the dotcom boom was 5 whereas it reached a high of 6.5 during the year 2007. ( The reason for the above disparity is none other than the dotcom era neglect of the smoke stacks!! ). Other than the above, we can see that many tops are placed in between 3.5 and 4.5. Therefore, it can be said that a P/BV ratio higher than 4.5 times the book is achieved by the market only in the blowout stages of the bull markets. However a word of caution too! The market can and it will remain significantly overvalued / undervalued in raging bull markets and extreme bear markets respectively for significant time periods.

Nifty Historical Dividend Yield


We can see that most of the data points in the Dividend Yield chart lies between 1 % and 2 %. Any values beyond this range has obtainable only for limited periods. See that a yield of 3.2 % (approx.) was available just before and during the start of 2003 - 2007 bull market. Even after the crash in 2004, the yield was at a high of 2.75 % points. At the bull market highs of 2000 and 2007 the yields went down to as low as 0.5 % and 0.75 % points respectively.

For an easy comparison study of the above charts, a chart of S&P Nifty for the corresponding period is also appended below:

S&P Nifty


The following table compiles the extreme data points of Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield and it's long term averages in color codes which are self explanatory. These are real historical data and are neither fiction nor anyone's opinion. From now on no one needs to try to find out where the market highs and the lows may form and why by using some common sense. However, the word of caution needs to be repeated here once more! The market can and it will remain significantly overvalued / undervalued in raging bull markets and extreme bear markets respectively for significant periods. Never jump the gun! Just keep the powder dry.

S&P Nifty - Extreme Valuation Points



Conclusion

S&P Nifty Valuation Guide

It seems that the time to conclude this post has arrived. Here is the final disclaimer. The above valuation guide is just the considered opinion of momentumsignal and is not any fundamental truth. One may consider, reject or ignore the stated opinion. One may also examine the effect of rate of growth of profits on the above ratios by looking up for PEG Ratio.

Today, ( 22nd February, 2010) the S&P Nifty closed at 4856.4 and the Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield are at 20.77, 3.42, and 1.02 respectively.

Cheers and Prosperous Trading !

( This is copy of a post made by momentumsignal on his blog and is re-posted by himself in this forum. No copyright violations
whatsoever !! )
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Old 03-07-2010, 09:18 PM
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Default Nifty Fundamentals Revisited .. !

What's The Nifty Funda Now ... ?

Here is a followup on the Nifty Fundamental Analysis for the first half of the calender year. Some of the readers might be aware of the article on Nifty long term historical fundamentals published on this blog. That analysis which covered the entire period of eleven years for which the fundamental data was available, can be read by clicking here.

To make the story short, that analysis lead to the making of a common sense guide to Nifty historical fundamentals and the same is reproduced below. But before going full force in to the analysis for the current period, a few words on the earlier analysis. Our common sense guide to the Nifty valuation is one of the most powerful tools long term investors can use in the Indian market. Think about an investor who invests for the long term in an index fund or an exchange traded fund ( ETF ) like Nifty Bees. Our typical investor invests only when Nifty is available below the long term valuation averages. Without any doubt, this investor will be a sure winner than the other "normal investors" who are attracted to the stock market only when the valuations are rich and speculation is wild. This is because our typical investor buys only when prices are low and she has margin of safety and time on her on side to be a winner. Unlike momentum traders who exits the market at the first sign of trouble, long term investors need to consider valuations with utmost care, because any investments made at higher valuations requires much more longer periods to become profitable. Further, such investments limit the power of long term compounding which is the real enabler of wealth creation.




S&P Nifty Valuation Guide


Now, let us check out the Nifty fundamentals for the last six months. As before, this analysis is done from the perspectives of historical Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield.



Nifty Historical Price Earning Ratio
The Nifty PE Ratio oscillated in a tight range between a high of 23.59 and a low of 20.06 during the review period. As you can see from the Valuation Guide, the valuations remained between the moderately high to the very high valuations in the six months period. The PE Ratio achieved it's high of 23.59 on 6th Jan, 2010 with a corresponding close of Nifty at 5282. It recorded the low of 20.06 on 25th May,2010 with a corresponding value of 4807 for the Nifty index.


Readers may also note that the PE Ratio is moving in a slightly downward trajectory due to increase in company profits, the denominator of the PE Ratio. ( For more details see the comparative chart of Nifty index and PE Ratio towards the end the article ).

Nifty Historical Price to Book Value Ratio




The Price to Book Value Ratio too moved in narrow range of 3.32 to 3.82 during first half. However, the trajectory of the PB Ratio seemed to be flat in the last six months.
Nifty Historical Dividend Yield




As Dividend Yield increases when stock prices fall, the yield moves opposite to the other two fundamental parameters of PE and PB ratios. The DY too moved in a narrow range of 0.91 to 1.05 % during the review period.


The important high and low points of Nifty and corresponding fundamental data recorded for the review period are highlighted in the following table.


Nifty Fundamental Highlights - Jan. - June, 2010




The High, Low and Average of Nifty and it's various valuation ratios for first half of the year are shown in the following table.
The High, Low & Average of Nifty Fundamentals - Jan. - June, 2010


The average values of Nifty, PE, PB and DY ratios during the period were 5119, 21.86, 3.62 and 0.96 respectively helping us to conclude that the Nifty index has mostly traded in the high valuation range.


Comparison Chart of Nifty Index & PE Ratio




As already stated elsewhere, the PE ratio has decreased nominally while Nifty has gained nominally during the first half of the calender year. Unlike the previous year, no great bargain prices were available in this year. Long term investors may wait before making substantial investments in the equity markets. They may enter at lower valuations as the post bear market economic recovery seems to be faltering the world over and it may lead to lower valuation entries when risk perceptions rise. However the Indian economy seems to be in the right trajectory, at least for now.


In case readers may require the Nifty fundamentals on a day to day basis, the data is available at the NSE website following the path Home > Indices > Statisics > P/E, P/B & Div. Yield values.

Cheers and Prosperous Long Term Investing !!!


© 2010, momentumsignal.blogspot.com All rights reserved.

Disclaimer: No research, information or content contained herein or in the accompanied spreadsheet shall be construed as advice and is offered for information purposes only. We shall not be responsible and disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered by the user or any third party as a result of or which may be attributable, directly or indirectly, to the use of or reliance on any information or service provided. All files/information is provided 'as is' with no warranty or guarantee as to its reliability or accuracy.
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Old 02-08-2010, 09:18 PM
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Default Does it make sense to buy Nifty currently … ???

Does Inflation Affect the Nifty Valuations ... ???

The return of galloping inflation isn't news anymore ! It's been here with us for the last year or so. Last week, the RBI too felt that inflation needs to be controlled after being fallen behind the curve in inflation targeting. ( Click here to read this blog's take on the last week's RBI action ). And the Opposition parties too got the price rise weapon to attack the government. Some analysts are even projecting a further rise of 100 basis points in the repo and reverse repo rates in the current financial year.


As a consequence of the RBI action, the interest rates in the economy will rise. Now the question is whether rising inflation is capable of affecting the Nifty valuations ? A Google search reveals a scholarly paper by Steven A. Sharpe, which says : " a rise in expected inflation coincides with both (i) lower expected real earnings growth and (ii) higher required real returns."


Now let's translate this to our kind of simple language. Let's start with the word 'real' from the above quote. Last week this author commented that if one year deposit rates are yielding less than the inflation rate, the 'real' interest is actually negative. Say a deposit earns 8 % and the inflation as per the whole sale price is 15 %. The depositor makes the deposit by postponing a buying decision which can be executed at a price of 100 rupees at present. She gets 108 rupees at the end of one year, whereas her purchase then requires her to spend rupees 115. It seems that she has made a loss of rupees 7 by making the deposit. This loss is called negative real interest. Now what could be the real interest ? Real Interest = Actual Interest - Inflation. And it is supposed to be on the positive side.


Now even if the Nifty companies could register a profit growth of 25 % for the current financial year, how much of that profit growth is 'real' if we assume a 15 % inflation rate ? 25% growth minus 15 % inflation leaves a 'real' profit growth of 10 % only. We have already explained the first part of the quote. Inflation affects not only the depositors but also the stock investors.


Now how can we explain the second second part of the quote which talks about "higher required real returns". The answer is simple. How can we increase the returns of an investment in stocks ? Buy at much lower prices than the prevailing prices. How is it possible ? Simple ! Since the prevailing prices are higher and do not give adequate real returns, it should fall.


A View to the Nifty Price Earnings Ratio


The NSE website says that the Nifty index has closed at a Price Earning multiple of 22.91 as on 2nd August, 2010. Here is a snapshot of the page !

What does a Price Earning ( P/E Ratio ) multiple mean. It means that the Nifty price is 22.91 times the Nifty earnings. We know the Nifty price. It closed at 5431.65. If this closing price is 22.91 times earnings, how much is the Nifty earnings. 5431.65/ 22.91 is Rs 237.


The beauty of the PE ratio is that it helps us to find out the rate of return ( i.e. earnings ) of the Nifty or any stock in comparison to the asking price just like we calculate the interest. Therefore, the current rate of return of Nifty is 4.36 %. ( 237/5431.65*100 = 4.36 % ).

However, there is also a short cut available to the above calculation. The current rate of return of the index or stock can also be calculated by dividing 100 directly by the PE Ratio. Now lets do the calculation : 100 / 22.91 = 4.36 %.

The pertinent question now is... does it make sense to buy Nifty at a current yield of 4.36 % when the inflation is reaching the lower double digit levels ?


Here are the parting words : Enjoy the rally till it lasts ! Growth chasers ( read FIIs ) enabled by the extended loose money policies of the outside world may stretch the rally too. But stock prices are not cheap. Let the buyers beware !!


Additional Disclosure : This author is neither an expert nor an economist. This article is based on pure common sense. The author takes the responsibility of any mistakes in the analysis too, on the condition that this article shall not be considered as investment advise. ( Or Let the readers beware )



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Old 22-09-2010, 01:55 AM
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Default Indices record new mile stones !

Nifty and BSE Sensex have recorded important round figure marks of 6000 and 20000. Coincidentally, Nifty historical fundamental valuation ratios have also marked important mile stones.

The historical price earning ( PE Ratio ), price to book value ( PB Ratio ) and dividend yield ( DY Ratio ) of the Nifty Index reached 25.37, 3.87 and 1.02 as on 21st Septeber 2010. The following is a snapshot of the Nifty historical fundamental as seen from the NSE, India website.
Nifty Index - PE, PB and DY Ratios


Source : NSE, India

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Old 25-09-2010, 09:32 AM
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Default bears have to wait upto 21600 sensex??????

can you find the logic in the statement.........

"God wants Nifty to test 6200 plus in this
settlement. On the other hand these bear bucks are long in stocks
and BULL GOD is not allowing stocks to move especially side stocks.
Once the settlement expires side stocks move up and Nifty will come
down as bears will not roll stocks as well as nifty and will settle the
difference in cash.

They will cough up difference of 2000 points which means they are
back at level of 14700 the level which was created after election
upper circuit. To recover from this loss bears will have to strive hard
till 26000 now therefore Sensex 26000 has come in site."

It seems sensex 26000 is certain based on this logic..... until that bulls are quite strong...... !!!!!!!!!

any comments?

regards
udaya
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Old 25-09-2010, 11:21 AM
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sorry it is 26000 not 21600
uday
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Old 25-09-2010, 04:37 PM
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Default

@ dr_udaya

I have no comments about the statement in your posts.

This thread was not meant for making any predictions like the one in the quoted ( ? ) statement.

The contents of this thread is more suitable for long term investors to understand the historical valuation picture. This in turn may help them in reaching to their own conclusions about the current valuations, margin of safety, overall market risk etc.

Please read the thread 'Index investing' by brijwant to get some idea how this information can be used in long term investing. ( Thanx brijwant for expanding the basic ideas in the thread to a useful level ! )

Markets do not strictly follow the fundamentals and even overshoot on both the side of the valuations.

In addition, markets may also discount the future expected changes in the fundamentals. However, estimation of the future fundamentals is beyond the scope of this thread.

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