Here we look at the markets from an earnings perspective and a cyclically adjusted view.
Sensex's P/E levels
The Sensex's P/E ratio has averaged at 18.3 in the last 15 years. Today, it stands lower, at 16.95 times. This level was last seen for a brief period in February 2014, when P Chidambaram was announcing his interim budget. Mid-2012-2013 was a more consistent period, when the Congress government was in a policy-paralysis mode and the GDP growth was at 5 per cent levels.
Cyclically adjusted P/E ratio
The cyclically adjusted P/E ratio (CAPE) is a longer-horizon tool that uses long-term average earnings adjusted for inflation to forecast future returns. The long-term horizon smooths out the fluctuations in earnings over a business cycle.
In January 2008, the cyclically adjusted P/E ratio for India was at its peak. That was followed by a meltdown on the Street following a global sell-off. Higher CAPE ratios, therefore, generally have meant lower returns in the immediately following time periods.
The current levels of CAPE are below the average of 20. Though the market can still go lower, this is now a cheap market and future returns following purchases in a cheap market have generally shown to have good results.
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