INVESTMENT INDICATORS

INVESTMENT INDICATORS

Knowing what indicators move markets is nice but not enough. The real sense is interpreting these indicators and determining their likely market impact. In addition to the absolute level of an indicator, two other important factors to consider are the trend in the indicator and the market's expectation for that indicator. Taken together, these often determine the market's reaction to a given economic or market report. Learning to anticipate the market's reaction to various indicators requires careful monitoring of financial markets, as well as experience in interpreting reports.


01.115

NIFTY PRICE TO EARNING RATIO

Nifty PE ratio measures the average PE ratio of the Nifty 50 companies covered by the Nifty Index. PE ratio is also known as "price multiple" or "earnings multiple". If P/E is 15, it means Nifty is 15 times its earnings. Nifty is considered to be in undervalued range when Nifty PE value is below 14 and it's considered to be in overvalued range when Nifty PE is near or above 22. The market quickly bounces back from the oversold region because intelligent investors start buying stocks looking to snatch up bargains and they do the exact opposite when Nifty P/E is in the overbought region. Check out what Professor Bakshi (a famous Indian value investor ) has to say about Nifty P/E. Research done by his firm shows just how dangerous it is to remain invested in an expensive market. Since NSE started, every time when Nifty's Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.

Source - https://craytheon.com/charts/nifty_pe_ratio_pb_value_dividend_yield_chart.php

Currently Nifty PE is between 26 and 27, which is highly expensive zone, a signifies over-valued markets.

2.115

MARKET CAP TO GDP RATIO

The market capitalization of all the listed companies in the country divided by the gross domestic product (GDP) of the country gives us this ratio. At present, the total market capitalization for all stocks listed on the BSE is Rs 135.75 trillion and India's nominal GDP is Rs 152.51 trillion. This gives us a market capitalization to GDP ratio of around 89%.

Apart from PE ratio, this is another ratio that helps to determine whether equity market is overvalued or not. The idea behind it is simple: given that stock prices are derived from expected earnings for companies and the GDP represents consolidated revenue in the economy, this gives an estimate of whether the two are moving in tandem. A rough price to sales ratio is how one expert described it. A ratio above 100% shows overvaluation and one below 50% shows that the market may be undervalued. The ratio was popularized by Warren Buffet around the time of the dotcom bubble and market crash.

India's market capitalization to GDP ratio has been rising since FY13; however, it has not yet crossed the 100% mark since. Additionally, if you consider the ratio in the market peak of 2008 from where markets corrected, it was significantly above 100%. Looking at this, one may say that markets may not be yet overvalued. However, the ratio should be seen more as an indicator and not in isolation as no one ratio is an accurate indication of market valuation. As a thumb rule, if the ratio is above 100%, there is greater need for caution in the markets. So, as per this indicator, at 89% of GDP, markets are not far off from expensive zone.

3.115

GOVERNMENT DEBT TO GDP RATIO

Government Debt to GDP in India averaged 73.42 percent from 1991 until 2016, reaching an all-time high of 84.20 percent in 2003 and a record low of 66 percent in 1996. India recorded a government debt equivalent to 69.50 percent of the country's Gross Domestic Product in 2016. .

Government Debt to GDP in India is expected to be 69.00 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. In the long-term, the India Government Debt to GDP is projected to trend around 70.00 percent in 2020, according to our econometric models. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt

4.115

INFLATION RATE

Consumer prices in India increased 4.88 percent year-on-year in November of 2017, higher than 3.58 percent in October and well above market expectations of 4.2 percent. It is the highest inflation rate since August of 2016, mainly due to rises in cost of vegetables and fuel. Inflation Rate in India averaged 6.73 percent from 2012 until 2017, reaching an all-time high of 12.17 percent in November of 2013 and a record low of 1.54 percent in June of 2017.

Inflation Rate in India is expected to be 4.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. In the long-term, the India Inflation Rate is projected to trend around 4.80 percent in 2020, according to our econometric models.

5.115

INTEREST RATE

In India, interest rate decisions are taken by the Reserve Bank of India. The official interest rate is the benchmark repurchase rate also known as repo rate. Interest Rate in India averaged 6.67 percent from 2000 until 2017, reaching an all-time high of 14.50 percent in August of 2000 and a record low of 4.25 percent in April of 2009. In February 2015, the government and the central bank agreed to set a consumer inflation target of 4 percent, with a band of plus or minus 2 percentage points, from the financial year ending in March 2017.

In the recent monetary policy announcement held on Dec 6th, 2017, the RBI kept its benchmark interest rate steady at 6 percent in line with market expectations. Policymakers said the decision is consistent with a neutral stance of monetary policy aiming to reach the medium-term inflation target of 4 percent +/- 2 percent, while supporting growth. However, the central bank also showed concerns about inflationary risks, mainly due to higher prices for house rent allowances, food and fuel and raised its inflation forecasts for the second half of the current financial year to between 4.3 and 4.7 percent from the previous 4.2 percent to 4.6 percent.

6.115

GDP GROWTH RATE

The growth rate in GDP measures the change in the seasonally adjusted value of the goods and services produced by the Indian economy during the quarter. India is the world’s tenth largest economy and the second most populous. The most important and the fastest growing sector of Indian economy are services. Trade, hotels, transport and communication; financing, insurance, real estate and business services and community, social and personal services account for more than 60 percent of GDP. Agriculture, forestry and fishing constitute around 12 percent of the output, but employs more than 50 percent of the labor force. Manufacturing accounts for 15 percent of GDP, construction for another 8 percent and mining, quarrying, electricity, gas and water supply for the remaining 5 percent.

GDP Annual Growth Rate in India averaged 6.12 percent from 1951 until 2017, reaching an all-time high of 11.40 percent in the first quarter of 2010 and a record low of -5.20 percent in the fourth quarter of 1979.

As per the latest numbers, the Indian economy expanded 6.3 percent year-on-year in the third quarter of 2017, above a 5.7 percent in the previous quarter which was the lowest in near three years, but below market expectations of a 6.4 percent. Investment and inventories growth rebounded, offsetting a slowdown in both private and public spending.

As per trading economics research, GDP Annual Growth Rate in India is expected to be 6.80 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. Looking forward, we estimate GDP Annual Growth Rate in India to stand at 6.60 in 12 months’ time. In the long-term, the India GDP Annual Growth Rate is projected to trend around 5.70 percent in 2020, according to our econometric models.

7.115

CREDIT RATING

In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of India thus having a big impact on the country's borrowing costs. Here we have included the government debt credit rating for India as reported by major credit rating agencies.

Standard & Poor's credit rating for India stands at BBB- with stable outlook. Moody's credit rating for India was last set at Baa2 with stable outlook. Fitch's credit rating for India was last reported at BBB- with stable outlook. DBRS's credit rating for India is BBB with stable outlook.

8.115

BUSINESS CONFIDENCE INDEX (BCI)

In India, the Business Confidence Index (BCI) is based on a sample size of around 300 companies covering all industry sectors, including small, medium and large enterprises from different regions. BCI is calculated as a weighted average of the Current Situation Index (CSI) and the Expectation Index (EI), with greater weight given to EI as compared to CSI. These indices are based on three questions on the performance of the economy, respondent’s industry and respondent’s company. Respondents are asked to rate the current and expected performance on a scale of 0 to 100. A score above 50 indicates positive confidence while a score above 75 would indicate strong positive confidence.

Business Confidence in India averaged 58.08 from 2005 until 2017, reaching an all-time high of 71.80 in the first quarter of 2007 and a record low of 45.70 in the third quarter of 2013. BCI in India increased to 64.10 in the first quarter of 2017 from 56.50 in the fourth quarter of 2016.

9.115

INDIA’S INDUSTRIAL PRODUCTION INDEX (IIP)

In India, industrial production measures the output of businesses integrated in industrial sector of the economy such as manufacturing, mining, and utilities. In India, manufacturing accounts for 77.6 percent of total output, mining for 14.4 percent and electricity for 8 percent. Industrial Production in India averaged 6.54 percent from 1994 until 2017, reaching an all-time high of 20 percent in November of 2006 and a record low of -7.20 percent in February of 2009

As per latest IIP numbers, India's industrial production increased by 2.2 percent year-on-year in October 2017, easing from an upwardly revised 4.1 percent gain in the previous month and missing market expectations of 3 percent. Output growth slowed for manufacturing (2.5 percent from 3.8 percent in September), electricity (3.2 percent from 3.4 percent) and mining (0.2 percent from 7.8 percent). Considering April to October, industrial production increased by 2.5 percent, compared with a 5.5 percent expansion in the same period of the previous fiscal year.

10.115

MANUCATURING PMI (PURCHASING MANAGER’S INDEX)

India’s Manufacturing Purchasing Managers’ Index measures the performance of the manufacturing sector and is derived from a survey of 500 manufacturing companies. The Manufacturing Purchasing Managers Index is based on five individual indexes with the following weights: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stock of Items Purchased (10 percent), with the Delivery Times index inverted so that it moves in a comparable direction. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month; below 50 represents a contraction; while 50 indicates no change.

The Nikkei Manufacturing PMI in India jumped to 52.6 in November of 2017 from 50.3 in the prior month and beating market consensus of 51.0. The reading pointed to the strongest expansion in manufacturing sector since October 2016, as both output and new orders expanded at the fastest pace in 13 months, employment grew the most since September 2012 and new export orders increased for the first time in three months. Meanwhile, there was a pick-up in inflationary pressures, with input costs increasing the most since April. The rate of output charge inflation was marginal. Firms were unable to fully pass on higher cost burdens to customers amid intensive competitions.

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