Someone asked me if India is overvalued? Well, yes and no. Let's look SENSEX's valuations. ROE: 23%. Price to Book: 3.7. ROE / PTB around 6.2x. Yes, their PTB is very high at 3.7x, but it's ROE has always been one of the highest in the world. A high ROE means very high returns on equity. E.g. you invest $100 and receive $23 annually. But a high PTB means if the liquidation value is $100 (assets minus liability), you pay $370 for it.
Now is 6.2x very expensive? The Europe's stocks may have a price to book of 1.25x, it's ROE is only 9%. It's ROE / PTB ratio is 7.2x, slightly higher than India's. But I ranked 50 countries' stock markets according to their ROE/PTB ratios and India's fall in the mid to upper decile. It's not the top 4 deciles, that's for sure. But it's not the most expensive.
What about earnings yield premium? India's 10-year government bond yield stands at 7.91%. It's PE is a whopping 20x, which translate into earnings yield of 5%. The bond yield is giving better returns than equity yield. It's a SELL. However, if you take into account its EPS growth rate of around 20%, things become unclear. If you buy a stock or own a company that grows at 20% annually on average, gradually falling to 16% on year 10?, what is your yield on average? The IRR is 10.55%. If your yield is 10.55% from stocks, and the 10-year bond is 7.91%, I'd still be buying stocks.
The difference of 2.64% in earnings yield premium is not enough for me to BUY because I'd only do so if earnings yield is at least 4.5% > 10-year government bond yield. But it is not a SELL signal either. I'd only SELL if earnings yield is < 0.5% over bond yield.
Chart wise, it appears set for a period of consolidation after rising exponentially. It could pull higher after that. On a macro perspective, many markets' earnings yield are still well above their bond yields. S&P500's earnings yield is 10.66%, factoring some growth assumptions. Its 10 year US T-bill is around 2.7%. It's a screaming BUY. Half the markets in the world, especially in the US and Europe are a screaming BUY, the other half is a HOLD. So the stock rally is unlikely to be over.
It's not a BUY, not a SELL, but HOLD. That means the SENSEX can rise higher. But I'd start taking profit if it you've made > 20%. Profit is never a profit until you have it in your pocket.
