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As on April 18, 2013, the BSE Sensitive Index, or S&P Sensex price-to-earnings (PE) multiple stood at 16.92 times, which is below its 20-year mean of 20.67. This, along with uninterrupted foreign institutional inflows is believed to keep the mood buoyant in the markets.
The Sensex PE multiple is expected to expand only when inflation falls, pulling down with it the interest rates. Given significant cut in interest rates may not happen immediately, this could be a good time to buy equities in small portions, and you could gain 15 to 20 per cent by the end of this calendar year, say experts.
"We are bullish on equities on the back of an all-time low PE ratio and also because there are many undervalued companies both in the large and mid-cap spaces that individual investors can gain from," says Sunil Mishra, chief executive officer of Karvy Private Wealth. Though, frontline stocks would be a better bet, both from the returns and safety perspective. Only those with high risk appetite should go for mid-caps as these are high-beta stocks and slip first when markets fall.
Agrees Alex Mathews, head - research at Geojit BNP Paribas Financials that valuations look attractive and frontline stocks are expected to outperform, so individuals can look at aggressively including frontlines to their portfolios.
PE ratio is inversely proportional to interest rates. To that extent, the PE ratio could sure be higher than its present level. However, many aren't sure if this reason is good enough to invest in the markets at present. "It is a good time to enter the markets but there are many events that may affect the markets, like inflation, interest rates and elections. Hence, if you are expecting this year to be a very good investment year, that may not be true," says Nitin Jain, country head - capital markets (individual clients group) of Edelweiss Wealth Management.
Apart from lower interest rates, there are a couple more reasons that may contribute to higher PE multiples. PE grows when the market is optimistic about future growth, which is not the case now. Today, sentiments are negative and hence the market is trading at a discount. Earnings growth also has not been consistent. And most of these factors will play out over the next couple of years, says Jain. Therefore, he advises going long only when inflation corrects significantly and the Reserve Bank of India brings down rates to that extent.
Piyush Garg, chief investment officer of ICICI Securities echoes similar views. "Deposit rates going to 7.50 per cent levels will be a good trigger to enter equities. Or, go overboard when Nifty touches 5,200-5,300 level. Today, it is difficult to envisage why should one invest in equities aggressively when deposits earn nine per cent," he explains.
Additionally, Garg feels PE multiple is just one indicator of market valuations. Sensex and Nifty earnings are not keeping pace with the GDP figures. Typically, nominal GDP (which considers current year prices; stood at 14 per cent as on April 14, 2013) should be equal to sales growth of Nifty companies that stood at close to 10 per cent in the third quarter of FY2012-13. Margins and profitability of most companies are stressed and not in sync with real GDP (that considers base year prices; stood at 8.5 per cent in FY11), which may be due to high inflation for companies --- high labour and capital cost. Wholesale price index is a skewed basket and does not reflect the real cost for companies.
