December 28, 2004

Is the indian stock market expensive ?

I would value the market like a stock ( the Sensex or the nifty is essentially a combination 30 or 50 stocks )

I would look at three factors to judge whether market is expensive or cheap

a) The current return on equity of the market as a whole
b) The current interest rates
c) The forward growth rate expected of the market

a and b are facts and c an estimate and hence any judgement is an estimate.

The current rate is around 18-20 % ( i do have exact numbers ). The interest rates (risk free) is around 7 % . Both these numbers from historical perspective are better than the average.The returns have been a bit lower and the interest rates a bit higher.

The forward growth rate can be conservatively be estimated at atleast the GDP growth of 5 % ( last decade number ). In reality it has been around 10 % but it always pays to be conservative

So with these three inputs and with some historical perspective that the average PE of indian markets have been 15-16 on average , we can assume that the market is slightly undervalued (from a long term perspective)

If the indian industry keeps doing well ( rate of return holds) and the inflation does not spike, the current levels do not look overlvalued

In my entire analysis there are'nt too many hard figures ...only expectations and assumptions

Well any 'expert' or layman (like mine) opinion is just that - a set of expectations and assumption which subsequent events can invalidate

So what i am doing - well for one not selling the index ( which one can through futures or ETF ) , but not buying too , because the market does not give a 'margin of safety' at these levels

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