Reflection on Indian equity market
Correction unlikely, price wise.
Price / Earnings multiples of small / mid / large cap to stay elevated because several trillion USD is at 0.25% interest rate. This rate looks like a permanent base.
Just as investors kept waiting for the dividend yield to come within 6% of bond in the past 50 years, and never switched to stocks, looks like P/E will stay expanded because of low interest rates. So, stocks are frothy but will stay frothy.
Per Capita at 1800$ provides a lot of room for growth. 10-20X.
ROEs are unlikely to go up to even 15-18% for NIFTY (unlike 25% during 2003-2008 bull run) because of surplus liquidity and general acceptability of India being favourable on demographic and knowledge parameters. Excess funds would / could set up more service / manufacturing capacity thus gravitating ROEs lower. Meaning intrinsically NIFTY will not and cannot grow 15-18%+ sustainably.
Bank NPAs not fully cleaned up. Average Johnny will pay for the bank NPAs for infrastructure and apartment loans. It is a bit confusing as infrastructure is not even close to meeting requirements, so it should be able to sweat and produce high ROE. Apartments costing 5-15 crores are understandably stuffed.
If the long term (30 year) rate on bonds is 0.25%, then stocks at 0.5% dividend yield and 10% growth at 40 times earnings are cheap mathematically.
Reversal in this chart can cause maximum wealth destruction in equities.
That reversal could come from new discovery / new industry actually resulting in optimism and productivity improvements.
At this time closed systems look quite good when money sans borders is comparing 0.25% bond to a 50 PE equity. Buying the biggest / most profitable department store on an Island of Fiji or Tonga sounds sane.