Valuation Conundrum: Why Nifty Is Still At A Reasonable Level

We look at the current euphoria around the Indian stock markets when experts are confused with the meteoric rise of the markets despite no comparative growth in the economy. We try and solve this conundrum. Today we analyse the comparison between the interest rates, which are at a two-decade low, and the forward price-earnings multiple (forward P-E) of Nifty.

Potent mixtures of momentum, exuberance and unchecked animal spirits have produced massive inflation in financial assets. All of this is a bit puzzling for the ordinary folk. The price growth is exponential, but experts and market veterans are not flummoxed with the accelerating index values and many valuation theories are circulating to justify the rapid upmove.    

One of the theories that is gaining ground is the comparison between the interest rates, which are at a two-decade low, and the forward price-earnings multiple (forward P-E) of Nifty.

For starters, it is important to note that stock markets ignore the past and follow future prospects. Thus, analysts and fund managers focus on forward earnings (profit) rather than trailing earnings.