While the broader market represented by Nifty 50 isn’t in a bubble, caution is warranted with midcaps, which appear significantly overvalued
By Indraneel Sengupta
One of the biggest questions on the minds of Indian investors and others is this: “Are the Indian markets overvalued?”
Is the Indian stock market in a bubble? Is the market at risk? More than that, what makes the F/O grow so much despite investors losing money? Well, the psychology of investments makes the investors invest in F/O rather than just quick money and gains. The stock price, valuation metrics, and financial jargon are still like French and Greek words for 90% of the investors.
Some other questions uppermost in the minds of people are: Why is there a surge of F/O?; Why is there a battle to prove investment gains to families?; Why choose stocks like food menu price tags in a restaurant?
Most investors have joined the market getting inspiration from friends, families, and financial influencers.
Most of the large-cap companies and some midcaps’ stock prices have climbed so high that a simple investor who does not understand the financial metrics of valuation will search for stocks of Rs 100 or below to make wealth. This is another reason why small caps and micro caps have gained so much.
A common investor who has limited savings also dreams of investing in the stock market but fails to buy Reliance or Adani stocks or any stocks that are above Rs 500 since he has limited money. These investors choose stocks just like they choose foods in a restaurant based on the price tag of the food. Hence, for these investors, the options with low prices are the best option.
For these first-time investors, investing in stocks is the big factor where the family never invested in stocks. For this generation, it’s a matter of proving to their family that by borrowing capital from or by investing their capital, they’re doing smart stuff, especially their Smartphone knowledge.
Now, many will say that a Mutual Fund is the best way to invest when one has a limited corpus and does not have much knowledge about investments. Similarly, the Mutual Fund SIP has become popular but failed to educate that out of Rs 23,000 cr SIP, only 20% is the net SIP.
The reason for this is that the Patience Factor has dropped significantly among investors who are first-time investors not only for themselves but for their families. They are the first generation investing in the Indian stock market – shifting from traditional old investors.
Now coming to the topic of the Insight. The answer isn’t straightforward. While the Nifty 50 appears reasonably valued, the Nifty Midcap 150 index raises concerns. Here’s a breakdown based on PE ratios:
- Nifty 50 Valuations
Current PE Ratio: 22.44
Historical Comparison:
20-Year Median: 21.35
15-Year Median: 22.37
10-Year Median: 23.43
5-Year Median: 23.15
The Nifty 50’s current PE is close to its long-term medians, indicating it isn’t significantly overvalued. Even when considering future earnings, the forward PE remains below the long-term median, suggesting the index is not overheated.
- Nifty Midcap 150 Valuations
Current PE Ratio: 43.14
5-Year Median PE: 27.25
The Midcap index’s current PE is about 58% higher than its 5-year median, signalling potential overvaluation. This spike in PE is due to a downturn in earnings despite a 17% increase in the index since April 2024. Even with optimistic future earnings growth, the forward PE remains significantly above its historical median, indicating that the midcap segment is in overvalued territory.
- Nifty Smallcap 250 Valuations
Current PE Ratio: 30.57
5-Year Median PE: 29.21
The Smallcap index shows a slight overvaluation compared to its 5-year median. However, it is not as overheated as the Midcap index. This stability is attributed to steady earnings growth, which has kept the valuations from stretching too far.
Conclusion
Large-cap (Nifty 50): Not overvalued, with valuations aligning closely with historical medians.
Mid-cap (Nifty Midcap 150): Significantly overvalued, driven by a decline in earnings and rising index levels.
Small-cap (Nifty Smallcap 250): Slightly overvalued but not as extreme as midcaps.
In summary, while the broader market represented by Nifty 50 isn’t in a bubble, caution is warranted with midcaps, which appear significantly overvalued.
Coming back to the point where I started, investing is now a matter of proving one’s smart move to the family which never made any investment in stocks.
The growth of the Demat account is unstoppable until the Indian markets witness a major correction or consolidation just like in 2018 or 2011-2013.
- Main Image by Sergei Tokmakov, Esq. https://Terms.Law from Pixabay has been used for illustrative purposes only
The writer is a Global Business Strategist & Global Macro Economic Researcher; the views/analysis are his own and The NewsPorter bears no responsibility for any error/s.
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