VR Logo

How the market may fare

Our analysis of the Sensex's historical P/Es gives an idea of where the market is headed in the next one year

How the market may fare

The recent fall in the equity market has seen investors running for cover. The reason this time: COVID-19, a disease caused by the coronavirus. There is no vaccine so far for it, which is the reason why investors are more panic-stricken than usual. Around the world, governments have locked down areas. Travel has come to a standstill. Obviously, the economy is going to be impacted in the short to medium run. As no one knows when this threat will subside, the markets are struggling to find a bottom, while investors are anxiously asking how the markets will fare in the future.

To address this, we analysed the daily P/E of the Sensex for the last 30 years. We then divided the 7,054 outcomes across various P/E brackets. We also checked the Sensex returns over the next one year for various P/E brackets. This gave an idea of the market direction. For instance, whenever the Sensex's P/E has been higher than 25 (1,200 outcomes), the median next-one-year returns have been -11 per cent. The lowest return was -56 per cent. Whenever the Sensex's P/E has been between 12 and 15 (861 outcomes), the median next-one- year returns have been 36 per cent. The market has shot up to as high as 103 per cent in the next one year.

As of December 2019, the Sensex's P/E was 29. If one goes by these numbers, a correction was imminent. The markets were looking for a reason to correct and COVID-19 has provided them just that.

How the market may fare