Current Market Scenario and Investment Decisions

There was a question from one of our readers regarding “is it safe to invest in the markets in current market scenario?”Let’s try and find out the answer together.

For simplicity of understanding , let us focus on Indian stock market. As on today , Indian market indicators BSE Sensex and Nifty 50 are trading at roughly 57,315 and 17,000. Let us carry out a simple google search regarding Nifty and Sensex current PE based on trailing 12 months EPS.

Index	Index Level	Approximate PE(consolidated)	Dividend Yield
BSE Sensex	57,315	27.2	0.97%
Nifty 50	17,072	23.1	1.22%

Now let us consider BSE Sensex first and try to get the historical chart of BSE PE over last few years.

This is a chart for BSE Sensex PE Ratio from 1990-2021. The average Sensex PE is 20.22. Current Sensex PE is 27.2 which clearly indicates that the Index is trading at premium valuation price band as compared to historical data. This doesn’t mean we should not buy or sell a stock. Only thing , under such circumstances , we need to take extra precautions and carry out deep analysis to mitigate the additional risk arising out of premium valuations. But definitely ,this is not a compelling buy situation.

From Sensex PE chart , here we can see that from 2014-15 onwards , Index rise has been mostly because of PE expansion. From about 20 , in 2014-15 , we can see Index PE has risen to almost 33 in 2020-21. This clearly indicates over a period of last 6 years , Index growth is mostly driven by positive sentiment , optimism and excess liquidity in the system due to very low interest rates across the globe. Over a longer period , Indices can sustain valuation only if they are supported by genuine earnings growth. Due to pandemic situation , implementation of GST and “Note Bandi” which happened over a period of last 6 years , real earnings have always lagged the Index valuation. This is a potential disaster situation. Unless and until there is a compelling reason to buy a specific stock , general Sensex buying decisions should kept under watch situation and situation should be monitored closely.

Let us see what Nifty Historical PE chart tells us.

From Nifty chart , we can see that over the last few years , rise in nifty and rise in Nifty PE Ratio are mostly in sync and based on rational rise in earnings. Hence , compared to BSE Sensex , Nifty 50 looks safer to buy . But, still the current Nifty PE level of 23.1 is higher than the historical median of 20.42. Hence , situation doesn’t warrant any immediate buy.

Let us see now BSE Sensex historical dividend yield chart.

Historic average Sensex dividend yield is 1.4% and present Sensex dividend yield is 0.97% which clearly indicates that Sensex and it’s constituent companies are trading at expensive / premium valuations and any buying now carries a substantial downside risk. We can see during 2007-08, Index dividend yield had dropped to a similar level and it was followed buy substantial erosion in Indices and a strong bear market. Be cautious.

Now , let us have a look at Nifty 50 dividend yield chart

The present Nifty dividend yield is 1.22% which is very close to it’s historical average which means , Nifty is mostly trading in line with the present market situation. Still, this is not a compelling buy situation.

Conclusion

After reading above information , it is obvious that common investor will ask “just tell me whether I should buy , hold or sell.” The answer to this question is definitely this is not an ideal buying situation based on broader market situation. Regarding holding , if you are holding some stocks and they are in profit , keep monitoring the situation very closely and hold. Regarding short selling , there is not a clear compelling reason to short the market also as especially Nifty can surprise us on upside. Hence , I will refrain from short selling.

Apart from this , in any market condition , there are some stocks which we can buy for future. In the subsequent blogs , I will try and draw your attention to some such stocks. Keep reading.