While the market has rallied considerably since Diwali, with the Fed cutting rates to 1% and the RBI slashing repo, CRR, and SLR, the Nifty is trading at a PE of 13.76. This is by no means cheap, but considerably below historical PE levels of 17.83. 

Monday last week saw the Nifty touching its lowest PE level since Jan 99 at 10.68, with the market closing at 2524. My guess is that ‘around now’ is a great time to invest, but not exactly now. I have a feeling that the 600+ point rally that we’ve seen is just a relief rally, and once participants start profit booking, the over-reaction to the positive measure subside, and as earnings continue to disappoint, we’ll soon be back in the 9000 region. When that happens, make sure you’re ready with your money, and clear on where you want to put it!

Historical PE Chart - NSE Nifty

Source: NSEIndia.com

The past couple of months have seen a strong correlation between oil prices and the Indian and Chinese equity markets. As oil fell, Indian equities rose, while China’s continued to fall. High oil prices are bad for everyone (except for the oil producing companies/countries, of course), even if governments subsidize petrol diesel by not passing on the price increases onto customers – as it happens in India. This is because the government needs to pay for subsidies by borrowing from the public – that is by selling more government bonds, which leads to an increase in interest rates.

A fall in crude means that the government needs to borrow less to subsidize oil, therefore reducing the upward pressure on interest rates. Lower interest rates are of course great for boosting demand for goods and services, as companies are individuals are able to more borrow more cheaply to fund their consumption and Read the rest of this entry »

There has been a lot of chatter in the market about FIIs staying away from the Indian markets because they feel that the valuations in India are still relatively quite expensive. Index PE ratios, when looked at in comparison to historical levels are a good way to determine how cheaply/fairly/expensively the companies that make up the index are relative to their historical levels.

But first, an explanation of how an ‘Index’ is calculated: There several ways to create an ‘index’ but the method commonly used is the ‘free float market capitalisation methodology’ where very crudely Indices are calculated adding together the market capitalisation of each of the companies chosen for that index based on some sort of criteria, dividing that figure by the sum of the market capitalisation of those companies that met the same criteria in a base year and then Read the rest of this entry »