Is Nifty PE Bidding Adieu To Bears?

Indian markets remained muted this week. It has ended the first quarter of FY23 on a weak note as Nifty 50 declined by almost 10%. Just when it seemed like it couldn’t get any worse we were hit with dark clouds of recession and inflation. The recent correction has left investors with fears of further price plunge. The number one question on investors mind right now is whether we are near a bottom.

Last week had shown from a quantitative perspective that only 14% of the Nifty 50 stocks closed above their 200 DMA as on 20th June, 2022. We had seen the markets bottom out in the past when this number is in the range 10-20%.

Apart from this we had also seen that google searches for the word “bear market” had recorded the second-highest readings after the Covid outbreak. This indicates market participants are fearful. Guess what happens next? Markets bottom out.

Now today we will have a look at one of the most popular fundamental metric –price to earnings ratio. The Nifty 50 PE ratio hit 19.87x on 12th May 2022 for the first time this fiscal. It has hit a low of 18.92x on 17th June, the day streets witnessed a violent blood bath.

Nifty PE Ratio and One Year Forward Returns %

Nifty50 Update 30 March 2022

If we look at the historical Nifty 50 PE trend, it exhibits that every time, this ratio falls below 20x, the 1 year forward returns have been higher. For instance, when PE fell to 15 in Jan 2003, the forward return was ~88%.

During the 2008-09 crash, the PE traded at extremely low level while the 1 year forward return was over 80%. During the Covid crash of 2020, the Nifty PE fell below 20. Nifty’s returns a year later was around 70%.

On the other hand, when a bull rally causes the ratio to surge we have seen a decline in 1 year forward return. In January 2021, when PE surged over 35x, you can see a drop in the 1 year forward return.

Just have a close look at the data in chart below…whenever the PE falls below 15; the benchmark has delivered an average 51.8% return over the next one year. When the PE is between 15 to 20 the average return is 15.2%. Currently, Nifty’s PE is placed at ~19x.

Nifty One Year Forward Returns % at Various PE Levels

Nifty50 Update 30 March 2022

This suggests that this could be a lucrative level for market participants to start nibbling in to good quality stocks from a medium to long term perspective.

Any more fall in PE would make markets even more attractive for investors.

Technical Outlook

Nifty 50 index ended mildly positive for the week after trading in a range of 350 points. The short-term trend is still bearish; However, Nifty has been outperforming its global peers, as most of the global equity indices are trading below their recent support. The resistance zone at 15,930 is a crucial hurdle for an uptrend. Until Nifty breaks above the same we suggest traders to maintain a neutral stance. Until that happens global sentiments are likely to keep market under pressure.

Nifty50 Update 30 March 2022

Expectations of the week

Mr. Market is predicted to stay volatile due to a slew of expected market-moving events. From the macroeconomic front, investors would keep an eye on FOMC minutes that will shed light on where the economy is headed. Further, global markets would also be influenced by the inflation statistics for China which is due next week. Back home, the Q1FY23 earning season will drive the market sentiment and create stock-specific actions. Investors are advised to pay close attention to management commentary and pick sound fundamental companies to focus on the long-term picture. Nifty 50 closed the week at 15,752.05, up by 0.34%.