Is this Right time to Invest in Stock Markets even if PE Ratio is High
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| PE Ratio's Importance |
In the past year markets have shown many colors, they went from all down to all up and also broke previous highs in just a matter of time. But the colour which is missing is of Consolidation, and even if markets are daily touching higher highs, they have to consolidate once at least.
So the Investors came to this market in the previous year (Robinhood Investors) they have to know that there is not only Bull and Bear market but there is also a market which gives problem to both of them and its a market which is in Consolidation.
Markets have rallied so much after a huge correction, which is even a good sign for the markets and it will help them in the long run, but then what is the reason people are afraid to invest? It is the PE ratio of Stock Markets which is also rallying with markets, and every one has taught us that a high PE ratio means it's not the time to invest in Markets.
Which we blindly believe without even checking the facts are right or not.
Now, what if I say that even if the PE ratio is high, markets can sustain on higher levels and can rally even bigger. Now if I say that this can be true, what is the logical explanation that this can really happen, for that you have to understand Currency Markets.
How Currency Markets affect the Stock Markets?
We calculate PE Ratio in Rupees, which makes currency play a very crucial part in this situation. So what does PE Ratio means? It means that if a stock is at 40 PE Ratio and if we have to buy it, then we have to pay 40Rs to earn 1Rs, which is costly. And if a company has a PE ratio of 20, then we have to pay 20Rs to earn 1 Rs. So respectively, in the above cases, the second case is more profitable because you have to pay less to earn the same amount.
But when the Rupee falls in comparison to the dollar the value of the Rupee decreases which means if we have to pay 10,000 Rs to buy a smartphone and the value of the rupee decreases by 10% in a year then the next year we will have to pay 11,000 Rs which is 10% more than 10,000 Rs.
Similarly, if we see it in the markets, if we have to pay 20rs to buy a stock today and 10% value is decreased of Rupee in the next year then we will have to buy it with a 10% premium which is 22Rs. So this can also be the case with the markets that the PE Ratio is increased because the value of the Rupee is decreased drastically and we have to pay more to get the same amount of Goods or Services.
And we are panicking that the markets are overvalued which they are not in the reality. But there can also be another reason due to which the PE Ratio is increased, which can be the Markets Expectation from the Indian Economy.
The High Expectation Ideology in Stock Markets
As our India's Prime Minister has a vision of making India a 5 Trillion Dollar Economy which is a very ambitious goal and Investors take these things into consideration and invest according to it. If India has a very good growth perspective in some particular sectors, then investors invest in it even if the sectors are not performing well currently.
This shows that investors are betting on the Indian future not on the current Indian situation and when it will be achieved the market will go into Consolidation which means that firstly you hope for the things and make the market overvalued and when the earnings and economy meet your expectations you book your profits or stop buying as your targets and goals are already reached.
So even if the PE Ratio is High currently it can be because people are expecting more from India than this in the coming years and to factor in this Growth, our economy has to improve as per the expectations and if it doesn't meet the expectations then there can be a correction which is obvious as people will dis-invest from India if it doesn't perform that well.
Hope you understand this economic cycle.
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