Is Nifty PE bidding adieu to bears? Here’s what the charts are telling us

Last week had shown from a quantitative perspective that only 14% of the Nifty50 stocks closed above their 200-DMAs as on 20th June, 2022. We had seen the markets bottom out in the past when this number was in the range of 10-20%.

Apart from this, we had also seen that Google searches for the word “bear market” had recorded the second-highest readings after the Covid outbreak. This indicates market participants are fearful. Guess what happens next? Markets bottom out.

Now today, we will have a look at one of the most popular fundamental metrics – price to earnings ratio. The Nifty50 PE ratio hit 19.87x on 12th May 2022 for the first time this fiscal. It hit a low of 18.92x on 17th June, the day Street witnessed a violent blood bath.

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Nifty PE Ratio and One Year Forward Returns %

If we look at the historical Nifty50 PE trend, it exhibits that every time, this ratio falls below 20x, the 1-year forward returns have been higher. For instance, when PE fell to 15x in January 2003, the forward return was ~88%.
During the 2008-09 crash, the PE traded at an extremely low level while the 1-year forward return was over 80%. During the Covid crash of 2020, the Nifty PE fell below 20x. Nifty’s returns a year later were around 70%.

On the other hand, when a bull rally causes the ratio to surge we have seen a decline in 1-year forward return. In January 2021, when PE surged over 35x, you can see a drop in the 1-year forward return.

The chart below shows that whenever the PE falls below 15x, the benchmark has delivered an average 51.8% return over the next one year. When the PE is between 15 to 20x, the average return is 15.2%. Currently, Nifty’s PE is placed at ~19x.

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Nifty One Year Forward Returns % at Various PE Levels

This suggests that this could be a lucrative level for market participants to start nibbling into good quality stocks from a medium to long-term perspective.

Any more fall in PE would make markets even more attractive for investors.

Technical Outlook
Nifty50 index ended mildly positive for the week after trading in a range of 350 points. The short-term trend is still bearish, however, Nifty has been outperforming its global peers, as most of the global equity indices are trading below their recent support. The resistance zone at 15,930 is a crucial hurdle for an uptrend. Until Nifty breaks above the same, we suggest traders maintain a neutral stance. Until that happens global sentiments are likely to keep the market under pressure.

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Expectations for the week
Mr. Market is predicted to stay volatile due to a slew of expected market-moving events. From a macroeconomic front, investors would keep an eye on FOMC minutes that will shed light on where the economy is headed. Further, global markets would also be influenced by the inflation data for China which is due next week. Back home, Q1FY23 earnings season will drive the market sentiment and create stock-specific actions. Investors are advised to pay close attention to management commentary and pick sound fundamental companies to focus on the long-term picture. Nifty 50 closed the week at 15,752.05, up by 0.34%.