Are You Still Following The P/E Ratio ?

Market Update - Wednesday, 03 Dec

The markets are currently in a bit of turmoil, and this month has not started well. The rupee has breached the 90 mark, which has caused some fear in the market regarding the falling currency.

What typically happens is that once the USD/INR market begins moving in one direction, it tends to continue.

This marks the fifth day that the Nifty has failed to post a gain after opening higher. However, today there was a noticeable attempt at a pullback, with the Nifty recovering approximately 100 points from its low to close where it did. We have now closed once again below the 26,000 mark.

• Nifty Junior also painted a fairly red picture, down by 1% today.

• Mid-caps were also down 0.89%, indicating there was little space to hide in the market today.

• Small caps found some support in the rough range of 16,500 to 16,700, and despite a pullback, still lost 0.44%.

• Nifty Bank pulled back the most and actually ended in the green, though some of its components were badly damaged.

• Gold remained steady, up 0.25% at 12,900, and Silver was also steady at 1,78,000.

Other Market Triggers

• IT stocks such as Infosys, TCS, Wipro, and HCL Tech were in the green. In the banking space, private banks were up while PSU banks were hit hard.

• SBI was down 1.68%, whereas HDFC, ICICI, Axis, and Kotak Bank were up. The rest of the market was generally down.

• The Nifty Next 50 was also deeply red, with PSU banks bearing the brunt of the selling—Bank of Baroda, PNB, and Canara Bank were all down 3% to 4%.

• Gas Authority, JSW Steel, Solar Industries, HAL, DMart, Motherson Sumi Systems, LIC, Vedanta, and Naukri were all down.

• Hindustan Zinc, Divi’s Lab, IOC, Pidilite, Hyundai, CG Power, and Bajaj Holdings were some of the stocks that bucked the trend for the day.

• In the 'Mover of the Day' segment, Hikal surged 9% with significant trading activity. This suggests that some news or announcement is likely forthcoming, as other pharma stocks underperformed.

U.S. Market Update

• The US markets had a mixed session. The broader market was down 0.2%, but the Russell 2000 and NASDAQ 100 were racing up at 0.6%. The Dow Jones was up 0.4%, and the S&P 500 was up 0.2%.

• Individual stock performance was strong for Boeing Co., which flew up 10%, Intel up another 8%, Booking Holdings up 5%, and Texas Instruments and Caterpillar also moving higher. Some of these stocks may be part of the Weekend Investing US stock strategy, but please note these are not recommendations.

What to watch next ?

• The Japanese 30-year yield crossed 3.4%. This is a massive increase considering it was at 0.5% not long ago—a sevenfold rise. For anyone with rolling debt or a flexible-rate home loan, this surge in the base rate will likely lead to defaults and other issues, as their EMIs could increase many times over.

• China, the US, Japan, and European markets—are all running with high debt. Japan's debt-to-GDP is 215%, the US is 125%, European debt is nearly 100%, and China's is 93%.

• Over the last 10 years, these major economies have allowed their debt to rise much faster than their GDP.

• This is unsustainable because as debt increases, the cost of funding rises. Governments must find a way to pay for these borrowings, which is limited by how much more they can tax.

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What To Read This Week ?

LIQUIDCASE stings LIQUIDBEES !

Historical correlation between Nifty and the US Dollar Index (DXY)

The Valuation Vortex: Why the P/E Ratio is Failing the Modern Investor

Today, we are exploring a fascinating but potentially misleading aspect of market valuation: the Price-to-Earnings (P/E) Ratio. While this is a foundational metric for many, it's becoming a source of considerable confusion and missed opportunities in today's market structure. The traditional benchmarks are simply no longer reflective of reality.

📉 The Obsolete P/E Rulebook

Historically, the P/E ratio—a simple measure of a stock's price relative to its annual earnings per share—was governed by clear, widely accepted rules.

This framework served as the primary "lens" through which value investors assessed the market. However, a look at recent data reveals a stark disconnect.

📈 The Sensex Reality Check: A Permanently Elevated Market

If we examine the Sensex P/E data over the last decade, the traditional 20-point threshold for "overvaluation" becomes instantly questionable.

The Sensex P/E has only dipped below 20 on a couple of occasions in recent memory: briefly in October 2015 and during the COVID-19 crash in March 2020. Since then, it has soared as high as 35 and currently hovers around the 22-24 range.

Adhering strictly to the "over 20 is overvalued" rule would have meant that investors would have been perpetually locked out of the market. Apart from those few months in 2015 and 2020, the market was technically never in a "buying zone" based on that strategy. Yet, the Sensex has increased by over 200% since 2016 with virtually no structural halt, proving that the old metric failed to capture the market's true momentum.

💰 The Structural Shift: When Money Changes Everything

The primary driver for this structural change is the unprecedented global monetary expansion. The massive monetary stimulus and money printing by governments and central banks have led to a significant increase in the money base. When the quantum of money in the system increases, all asset classes—stocks, gold, and real estate—tend to inflate.

This influx of capital has fundamentally raised the floor for valuation. The upper limit of "fair value" has not remained static at 20; it has arguably shifted to 25 in just the last four to five years. In the future, this number could climb even higher, potentially reaching 30, 35, or even 50. There may come a time when a P/E below 50 is considered standard or even "undervalued."

🎯 The Death of Absolute Valuation

This environment means that the concept of absolute valuation—the idea that a company is inherently expensive or cheap solely because its P/E is 25—has lost its meaning. Many long-term investors who clung to the hope of finding stocks at the old 12-15 P/E have missed out on years of growth, as the market simply refuses to go back to those levels. Today, seeing companies trade at P/E multiples of 70, 80, or 100 is a common occurrence.

Pointers for the Modern Investor

1. Use P/E for Relative Valuation: The P/E ratio is still highly useful for comparing peers. If Company A trades at a 40 P/E and Company B (in the same sector with similar growth) trades at a 30 P/E, there is still an important relative difference to analyze.

2. Avoid Absolute Pitfalls: Do not let a high P/E (like 25 or 30) alone stop you from investing. That threshold is now largely arbitrary.

3. Embrace Momentum: For clearer entry and exit strategies, consider supplementing or replacing absolute P/E analysis with methodologies like Price Trend Following or Momentum Investing. These approaches offer a more structured, rules-based framework for timing trades, which can reduce the guesswork prevalent in today's skewed valuation landscape.

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