Has the Indian stock market climbed too fast too soon?

Hello Reader! Let’s talk about India’s stock market today. It’s been hitting some serious highs lately, and you’ve probably wondered, is the market riding too high? Could a crash be lurking around the corner?

Well, before we jump to conclusions, let’s break it down. We’ve all heard about stock market crashes—the dot-com bubble in 2000, the global financial crisis of 2008—they rocked the markets and wiped out billions in wealth. And behind many of these crashes is something that often comes up in finance circles: the CAPE ratio, or Shiller’s P/E.

Back in 2000, the U.S. stock market’s CAPE ratio hit a peak just before the bubble burst. Same story in 2007, right before the global financial crisis. So, when we see that India’s CAPE ratio is now at 43 times, dangerously close to its 2008 levels, it makes you stop and think. On top of that, foreign institutional investors (FIIs) have already pulled out nearly $7 billion from Indian equities just this October. The question is: should we panic?

What is the CAPE Ratio?

First, let’s understand the CAPE ratio. Unlike the regular P/E ratio, which compares a stock’s price to its current earnings, the CAPE ratio averages earnings over the past ten years, adjusting for inflation. This makes it a better long-term measure to assess whether stocks are overpriced or undervalued.

Right now, Nifty 50 is trading at a P/E of around 24.7, higher than its 10-year average of 23.4. Some might call this “irrational exuberance”, meaning the market could be overconfident, setting itself up for a fall. When prices rise faster than actual earnings, the market can get a bit ahead of itself.

But while the P/E ratio tells us what’s happening right now, the CAPE ratio gives us a wider view. When the CAPE is high, it’s usually a red flag that stocks might be overpriced. But here’s where it gets tricky—the CAPE ratio isn’t perfect.

Why shouldn’t we rely solely on CAPE?

Sure, the CAPE ratio signals when stocks are expensive, but there are limitations. It assumes the market stays the same over time. But we know that’s not true. Companies grow, industries change, and global markets evolve. For example, the U.S. stock market is now dominated by tech giants like Apple and Microsoft, and they weren’t always such heavy hitters. The CAPE ratio still factors in earnings data from when these companies were much smaller, making the comparison less accurate.

Another issue? Stock buybacks. Companies often buy back their own shares, reducing the number of shares available and artificially boosting earnings per share without actual growth. The CAPE ratio doesn’t consider this, so it can sometimes give a distorted view.

And if you try comparing CAPE ratios across countries, you run into more problems. For example, U.S. companies have seen stronger earnings growth and more buybacks compared to Indian companies, making it unfair to directly compare their CAPE ratios.

Why is India’s CAPE Ratio so high?

India’s CAPE ratio is sitting at a lofty level, suggesting that stocks are expensive. But why? Well, India’s economy is growing faster than many others, making it a hot destination for investors. It’s like the latest trendy restaurant that everyone wants to get into—demand is high, and that pushes prices up.

Plus, India’s increasing presence in global indices like the MSCI is attracting more institutional money, driving stock prices higher. Investors are essentially paying a premium for the India growth story. But keep in mind, India’s stock market is now the second most expensive in the world after Greece. That’s something worth thinking about.

Does a high CAPE Ratio mean a crash is coming?

Not necessarily. The CAPE ratio is based on historical data and isn’t always a reliable predictor of future crashes. Markets evolve, and past trends don’t always repeat themselves.

So, what does this mean for India?

A high CAPE ratio might suggest that the market is riding high, but it’s just one part of the equation. We also need to consider India’s growth potential, investor sentiment, and how companies are creating value for shareholders. The stock market is a complex machine, and no single number can predict the future.

As the legendary investor Peter Lynch once said, “No one can predict with any certainty which way the next 1,000 points will be. Market fluctuations, while by no means comfortable, are normal.” In other words, the market may drop, or it may soar—but worrying about trying to time it perfectly? That’s a game no one wins.

So, is India’s stock market riding too high? It might be. But before making any big moves, keep in mind that markets are unpredictable, and staying informed is the best strategy.

? Coming up next week!

General Market Overview:

IPO News:

• Indian markets had a volatile week due to mixed global cues. Sensex and Nifty fell sharply on Friday.
• Market outlook: Experts predict a possible market bounce back in the next 2-3 days. FII selling and DII buying are likely to continue, especially in beaten-down large-cap stocks like private banks.
• Concerns: Potential disappointments in India Inc's Q2-FY25 earnings and weak festival sales (e.g., Bajaj Auto) could trigger a market correction.
• Other factors: Geopolitical tensions, US presidential election uncertainty, and RBI’s cautious inflation stance are key concerns for investors.

IPO News:

• Waaree Energies IPO: Opens on October 21 at a price range of Rs 1,427-1,503 per share. Closes on October 23.
• Deepak Builders & Engineers IPO: Opens on October 21, closes on October 23, price range Rs 192-203 per share.
• Godavari Biorefineries IPO: Opens on October 23 and closes on October 25, average cost of acquisition is Rs 188.91 per share.

Key Earnings Releases:

• October 21 (Monday): Bajaj Housing Finance, CG Power, UltraTech Cement
• October 22 (Tuesday): Adani Energy, Bajaj Finance, ICICI Prudential, Varun Beverages, Zomato
• October 23 (Wednesday): Bajaj Finserv, HUL, Pidilite, SBI, TVS Motors
• October 24 (Thursday): Adani Total Gas, Colgate, Dixon Tech, Godrej Consumer, ITC, Oracle Fin Serve
• October 25 (Friday): Bank of Baroda, BPCL, Bharat Electronics, Coal India, Interglobe Aviation, JSW Steel
• October 26 (Saturday): CDSL, ICICI Bank, IDFC First Bank, JK Cement, Voltamp Trans, Yes Bank

Important Economic Data to Watch:

• India Manufacturing PMI: Flash reading for October to be released. The PMI in September fell to 56.5.
• India Services PMI: Flash reading for October to be announced. The revised September figure was 57.7.
• Euro Area Consumer Confidence: Flash reading for October will be shared. The index was -12.9 in September.
• UK Manufacturing and Services PMI: Flash readings for October will be announced. September figures were 51.5 (Manufacturing) and 52.4 (Services).
• US Initial Jobless Claims: Data for the week ending October 19 to be released. Previous week claims were 241,000.
• US Manufacturing and Services PMI: Flash readings for October to be released. September figures were 47.3 (Manufacturing) and 55.2 (Services).
• India Foreign Exchange Reserves: Data for the week ending October 11 to be announced. The previous reserves were $701.2 billion.

?? Prime Wealth Finserv In Media Chakravarthy V., wrote for Economic Times Is Sebi’s new asset class a game-changer for Indian investors?

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