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Weakness in equity markets to continue due to valuations

Returns on the MSCI EM index one year after crossing 18 times has been on an average -7 per cent.

, ET Bureau|
Updated: Sep 24, 2018, 09.02 AM IST
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Based on the P/E, it appears that overseas funds have been value investors and invested a large chunk of money at times when India’s P/E was trading below the long-term average.
ET Intelligence group: The current bout of weakness in the equity markets is likely to continue in the medium term because of elevated valuations, recent capital-markets history shows.

Returns on the MSCI India index — a dollar-denominated gauge used by global fund managers to benchmark their Indian portfolio — are negative in the three-month to one-year horizons if the broader market trades more than 18 times its projected one-year earnings. The MSCI India is trading at 18.17 times its expected one-year forward earnings, a premium of 18 per cent above its ten-year average.

Equity snip 1

Returns on the MSCI EM index one year after crossing 18 times has been on an average -7 per cent.

Interestingly, average returns on the MSCI EM index when it trades between 9 and 18 has been +7 per cent to +22 per cent. The average yield for the next one year increases as the P/E drops. For instance, when P/E is between nine and ten, the average one-year return is 22 per cent, while the return drops to just 7 per cent when it trades 17-18 times.

equity snip 2

Out of the total 2,465 observations in the past ten years of the MSCI India PE ratio, it has traded more than 18 times in just 4 per cent of the total sample size. In the past ten years, for about a quarter of the total trading days, P/E ratio of the MSCI EM index has been the range of 16-17.

Based on the P/E, it appears that overseas funds have been value investors and invested a large chunk of money at times when India’s P/E was trading below the long-term average. For instance, overseas funds deployed nearly Rs 6.2 lakh crore into Indian equities in the past ten years, and 46 per cent of the total was deployed between January 2011 and May 2014 when India’s PE was trading below the long-term average of 15.33.


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