MW: Is NIFTY expensive right now?
Deep dive into NIFTY's valuation metrics and the risk premium to figure out if NIFTY is expensive at this particular point of time
Hi,
A question that keeps buzzing nowadays is, “If NIFTY is at ATH, is it worth investing in?”
Now last week, we did mention how NIFTY may continue its momentum in the short term but other metrics we looked at then did caution about its short-term outlook.
But let’s add some context to the same basis the current valuations of the Index today.
All views are personal and for educational purposes only, please do your own research before investing and trading
NIFTY PE
If you’ve been a reader of Manifest Wealth in the past, you’d know that I personally don’t prefer the to draw conclusions basis comparing the average PE of past 10Y with current PE since the PE methodology did change in 2021 with the index starting to consider consolidated earnings instead of standalone.
However, even then, we shouldn’t ignore the aspect that NIFTY PE today is lower than March 2021, meaning the Index is cheaper than it was 2Y ago, even with the new ATH, although not by much.
NIFTY PB
The PB is my preferred metric to look at NIFTY valuations, for 2 reasons; majority of the weightage of NIFTY is financials (and guess what ratio is used there?) and the other is that we don’t have the issue of methodology change.
Now NIFTY is expensive when we look at from a pure Price to Book value perspective, infact it’s above the 95% confidence level.
NIFTY Dividend Yield
If we were to look at the dividend yield, that’s been on the rise for the past 2 years and is in fact above the 10Y average (in this case, being above the average is a good thing). Showing signs of undervaluation of NIFTY.
NIFTY Earnings Yield - US10Y Spread
The earnings yield - US10Y spread is a way to see the valuation of the NIFTY in relation to the US10Y - which is a nice way to check if it’s cheap and making relative sense as compared to a safe instrument especially for international money.
Now here, the thing is, well, we aren’t doing that well. infact the spread is the lowest in the past 10Y due to the rise in US10Y rates.
Now earnings yield is essentially the reverse of the PE, so yes this earnings yield does suffer from the same methodology problem explained early, however similarly, the fact that’s it so low is a cause for caution.
Conclusion
Is NIFTY expensive?
If we isolate it to what it has been in the past vs. today - no, not really.
While the PB does show signs of overvaluation, the DY shows quite a bit of undervaluation, it’s also fair to conclude that the NIFTY PE is closer to the average.
Hence, well while it’s not Zara like expensive, it’s not Zudio pricing here, it’s more Westside at the moment.
What I mean here is that it’s neither expensive, nor is it explicitly cheap.
However, when we add the relative valuation into picture and compare it to the US10Y, it starts to lose the lustre and does show NIFTY to be still expensive and offering low risk premium over the US10Y.
Hence, do stay frosty.
Until next time, keep manifesting wealth.
Disclaimer 1: All above views are purely for educational purposes and are not to be taken as investment advice. Investment or trades taken of any kind based on this are solely the person’s risk and I bear no liability. Please consult a financial advisor before making any investments. All investments are subject to market risks.
Disclaimer 2: The views presented above are mine and not of any organization(s) I work with / am employed at
Sources:
NSE
NIFTY Indices
Investing.com