Indian Stock Markets Are Overheated

Most economic data points and indicators show that Indian Stock Markets are overheated

- Niti Kiran

Very often, headline numbers do not divulge too many details. To let the numbers do the talking, it is important to dive deeper. Also, it is difficult to accurately estimate any measure without studying its long-term trend and comparing it with other relevant indicators. Business Today looks at some such indicators such as price-to-earnings (P/E) ratio, market cap-to-GDP ratio and corporate fundraising to gauge market sentiment and portray the state of the economy.

Fundamental statistics such as P/E ratio are popularly studied in two forms, trailing and forward, to determine the valuation of a stock or an index. Trailing P/E is calculated by dividing the current market value by earnings per share over the previous 12 months. Forward P/E looks at a company’s likely earnings per share for the next 12 months. Asset allocation trends in terms of cash and stocks attempt at measuring the risk appetite of investors. Further, the growing disconnect between the market and the economy is captured in the market capitalisationto-GDP ratio. The miserable state of the economy due to lacklustre investment and consumption, and some visible green shoots due to the growing contribution of corporate earnings in quarterly GDP, have also been looked at. Last, but not the least, the pandemic year was defied by record high corporate fundraising, on softer interest rates.

Sensex P/E: Trading At A Premium

This index valuation metric is trading at a multiple of 32.9, significantly higher than its five-year trailing average of 23.5. Among its constituents, almost three-fourth are trading above their long-term average.