Join our Stock Market News Group at GetPaidIndia on Telegram and WhatsApp.
This website is purely ACADEMIC in nature and NOT a stock market recommendation service or a tip provider. No live data or feeds are provided and all information is historic only. Information is provided for ease of understanding for the purpose of learning. Accuracy of definitions etc is not mantained. I am not a SEBI or IRDA registered.
Nifty and Sensex PE
Early we had an Introduction to Financial Ratios used in Stock Analysis and studied about PE Ratio.
Lets continue to the next topic: *Nifty PE*
Like for equity shares, Nifty and Sensex also has a PE ratio as well.
Let us look at the Nifty PE
How can v compare nifty pe wid industry pe
Nifty PE cannot and need not be compared with Industry PE. We can draw further inferences from the Nifty PE alone
Nifty is nothing but a collection of company stocks.
So Nifty PE is their collective PE.
From the image above, what is the value of Nifty PE today?
There are certain bands during which Nifty PE is termed Cheap, Moderate and Expensive
The PE bands are as follows:
Cheaply Priced PE < 16
Moderately priced PE 16-19
Expensively priced PE > 19
Now, we know that Nifty PE is over 20. So it is expensive.
Historically speaking, when Nifty PE keeps going up, tension of a possible market correction increases.
This is the period when investors need to be cautious.
Most large scale investors reduce their fresh investments in this zone.
Of course, there may still be some stock-specific value left and valuations still look good for some companies. But Nifty / market as a whole would be expensive to invest in.
That means, going forward, the growth of investments made in current market situation (at current levels) will be less compared to that when PE is at 16 or sub 15.
In fact, if you see, in the past few days, the Nifty and Sensex retracted a bit
Yet today, we are still in the expensive zone.
Does that mean that we should stop our investments?
Wont it make sense to wait for a correction or some pull back?
If share prices come down we could but them at attractive levels?
Pull back, closing in the red are softer words. Correction is a hard word. Say Sensex falling down by 1000 points etc.
No. We should never stop investing (unless we are out of cash)
Because we already said,
as a long term investor,
we will be in the market in all market conditions.
How to invest when the market is at highs, we shall discuss later.
But remember that we can never time the market.
So the best thing is to stay invested albeit with some modifications.
So, when the market is going up there are three things you need to check before taking a decision:
1. Stock PE
2. Industry PE and
3. Nifty PE
When Nifty PE in expensive zone (above 19), you can do one of the two things:
1. Continue to invest the same old way using cost averaging.
2. Reduce the daily investment budget
If possible, try to make your own rules regarding daily investing.
For instance, assume my daily investment budget is Rs. 1000
When Nifty PE is 20, i would invest Rs. 1000
If Nifty PE is 21, i would invest less, say Rs. 900 i.e Rs. 100 less than the usual
If Nifty PE is 22, i would invest less, say Rs. 800 i.e Rs. 100 less than the usual
So, as Nifty PE is increasing, i am reducing my daily investment amount
On the other hand, if Nifty PE came down to 19, i would invest Rs. 1100
If Nifty PE came down to 18, i would invest Rs. 1200
and so on..
And when Nifty PE is coming down, i will increasing my daily investment amount.
The above numbers are just an example. You need to decide the right combination according to your cash flows and risk appetitle.
We are still using cost averaging method but keeping in mind Nifty PE.
It is important to stay invested than missing few important investing days.
Do not exit a stock just because its PE went up or CMP is too expensive.
When new quarterly data arrives, the market will automatically take into account the gap (cheap / expensive nature) and then move appropriately.
- Managing investment allocation with Nifty PE as an indicator*
Earlier we saw how Nifty PE can be used as an indicator for determining our daily investment budget.
In a similar manner, we need to frame a method to determine how much cash we need to invest in the market.
As Nifty PE keeps going up..
your daily cash allocation shoud reduce and ..
you need to consider booking profit (from expensive companies) and ..
increase your cash balance.
Withdraw this unlocked cash from your trading account and ..
put it in your bank account (may be in a fixed deposit).
And when the markets correct and ..
Nifty PE becomes attractive, ..
you can re-deploy the cash ..
from bank back into your investment account ..
Because, your daily cash budget increases when Nifty PE is at attractive levels (sub 19 / 15 levels).
Using this knowledge on PE, i will now make a new rule:
- Rule #12: Keep an eye on Nifty PE when investing.*
I suppose, for the stocks not part of Nifty, we should look at stock and industry PE, right?
@Tiwati: Better to use the index to which the stock belongs to. All stocks will be part of one or other index. And all indices will have PE. In general, following Nifty PE is easier and better than to use other indices or even Stock / Industry PE. Such things require lot of calculations and observations. Why complicate when we can simply use Nifty PE that broadly defines the course of the stock market?
For good liquidity stock buy on sip basis same trick have to apply ?
@Sharmaji: Yes. You may use it. We just modified our Cost Averaging Method to include Nifty PE as a decision factor.
Understood the topic on PE?
Can we move forward?
- Assignment Alert*
Make a list of Top 15 shares of Nifty.
Find their PE and find how their PE is, relative to Nifty PE
What is the impact of Nifty P/E on the stock P/E ..I mean the link between both ,i.e. Nifty P/E and individual Stock P/E .
Nifty PE Ratio as an Indicator of Stock Market Valuation
Nifty PE ratio is calculated by dividing the sum of market capitalization by the sum of earnings of all companies which constitute the S&P CNX Nifty
Every stock of Nifty will have a specified weight age.
So, every stock impacts Nifty and there by Nifty PE to that extent.
In general, all Nifty stocks move in tandem (direction).
So, if Nifty is coming down, the stocks too would come down.
So Nifty PE movement and Stock PE movement are in a way related.
I will explain about index and constituents in detail in our topic of Stock Market Indices.
- Question: I heard that PE valuation of many small/ micro companies are currently in the range of 30 – 40. If so, is it advisable to get out of such stocks and watch the market from the sidelines?*
Company PE alone cannot be a decision factor.
- Rule #11: Compare Company PE with Industry PE
To decide to stay in sidelines or not can be best done looking at Nifty.
Nifty PE is currently at 21 levels. Anything above 18 means market is expensive. Investing in this zone is advised if you have a 10+ year investment view. The PE value of Nifty gets revised when companies begin reporting to quarterly results. So stay put and see how company performances influence Nifty PE in the next few days.
- Rule #12: Keep an eye on Nifty PE when investing.
We see Nifty falling down everyday but the Nifty PE seems to be not moving much. Why? It looks like Nifty PE is staying at 21 even when Nifty fell from 8200 to 7900 levels.
You are looking at only the price part (8200). What about the EPS !? Remember PE = Price / EPS and EPS = Profit generated / Outstanding shares
How can eps will change daily ?
EPS of individual stock wont change daily but for Nifty 50, it would change when there is any result announcement of the underlying companies on a given day.
Can someone calculate EPS of Nifty based on yesterdays closing Nifty value and PE value? Similarly compute todays EPS based on today's closing and todays Nifty PE?
- Further Reading*