Lots of discussion in this sub about whether it is good time to invest or not. The arguments seem to me, mainly qualitative. I think I can summarize the arguments below
For markets being overbought/valued
PE > 22 has usually given poor 3Y, 5Y returns in the past. This is somewhat controversial but it is more true than false.
Many blue chip stocks(Nestle,Asian Paints,Eicher,Ambuja,Zee etc) are trading at insane valuations. This is usually a bad sign and there is no way those stocks are worth that much. My own research agrees with this as well but I can be wrong. Whiff of Midcaps and Smallcaps also being overbought as well.
Retail participation is usually the highest when markets are at their peak. I don't have numbers for this but you can use the increased activity in this sub as a proxy I guess. I have also read that retail participation is increasing from a few news outlets as well.
For Markets not being overbought/valued
Lower Interest/Inflation means that markets naturally trade at a higher PE. Indeed we are seeing the lowest interest rates in a decade and trending lower.
High growth is just around the corner and a market with high growth naturally trades at a higher PE. Looking at analyst estimates, this does seem to be the case as many companies in the nifty have 30%+ EPS growth estimated for next 3Y. Analysts are forever optimistic so salt, pinches blah blah.
@loulou1 A simple explanation would be to add up the earnings per share of all the companies using the same weights used in the index to get the EPS per share of the index. Then you divide the current price of the index by the EPS.
The actual calculation would have to normalize the EPS for differences in share prices across the companies.
I have only given a basic explanation, different indices calculate PE differently. I am not privy to the way NSE calculates theirs.
@debsy17 So, what number for the nifty pe is at your hand? Do you calculate it on your own using the steps mentioned above by you or do you get it from some site?
@debsy17 I feel the current situation is the effect of inflation and that markets are only slightly overbought (if at all), but I haven't really run any numbers on it. However, another effect of inflation is going to be low returns everywhere - so "PE > 22 has usually given poor 3Y, 5Y returns in the past" is going to hold here too - at the same time, debt isn't going to be any better either.
@debsy17 I don't understand most of the financial complexities, but lately I started tracking the PE over here (http://www.equityfriend.com/investm...ifty-pb-chart-nifty-dividend-yield-chart.html). Have decided to keep SIPs going since my allocation is 50:50 equity:debt. As the debt component grows, I'm more inclined to push more into equity thereby making it 75:25 or 60:40 at the very least. Holding on right now since everyone is calling the market overpriced and waiting for the PE to fall. I have made the mistake of investing at the peak when I started in March 2015 and don't want to repeat it.
My goal is to do the following rebalancing if the market falls:
60:40 for PE < 21
75:25 for PE < 18
Although some people would argue that PE based investing may not be ideal, it doesn't matter. Do what you feel comfortable doing.
@shafiqulWould be wary about using the PE from the source you have mentioned. It isn't the true PE of the index but the average PE of all companies in the index which will be lower.
