3.4x: The price-to-book value of the Nifty 50 index.
- In the past, when experts tried to justify the fact that the markets are not expensive, they said one should not look at the price to earnings (P/E) ratio of the market in a year in which companies' earnings have collapsed, thereby making the P/E ratio appear unnaturally high.
- Instead, they said, the price to book value (P/BV) is a truer barometer of market valuation. It now appears that the P/BV ratio has also entered expensive territory.
- This ratio now stands at 3.4x for the Nifty 50 index, compared to the historical average of 3.2x. Experts say the P/BV ratio entering the expensive zone is symptomatic of the fact that the market has diverged from economic realities.
- According to the Reserve Bank of India, the country's gross domestic product (GDP) is likely to shrink by nine per cent this year. Such dismal growth prospects are not being reflected in market's valuation.
- The Indian market's P/BV ratio is also trading at a premium compared to other emerging markets. This is happening at a time when the market's return on equity (RoE) has got compressed, something which in other years justified its premium valuation.
- Investors need to turn cautious when such indicators reflect that the market is entering the expensive zone.
A few links for further reading
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