Next Indian stock market crash prediction I Indian stock market future predictions

In the long term stock market follows earnings

India’s GDP forecast by World Bank :

India’s economy is expected to grow by 8.3% in 2021–22

United Nations Conference on Trade and Development. (UNCTAD) projected India’s economy to grow at 7.2% in 2021.

FII invested more than Rs 1.6 lakh crore ($23 billion) in the Indian share market which is the highest among emerging markets many emerging markets have seen outflows this year.

Last year FII invested $14.2 billion in the Indian share market which was also the highest among emerging markets many emerging markets

FIIs are attracted to the Indian stock market because of expected strong economic recovery and earnings growth in future, massive vaccination, and support and reforms by the government to boost the economy.

Monthly SIP collection has crossed Rs 10000 crores for the first time in September 2021, the equity inflows in SIP has been supportive for the stock market.

After a sharp rally, a correction is expected but not a crash as the rise in the share market is backed by growth incorporates profits, so it is not a bubble.

So what should an investor do to stay invested or book profits? And the answer is timing the market is very difficult. But there are some indicators that can help you in taking the right decisions in the case of lump-sum investments.

One of the main indicators of the stock market is PE Ratio.

P/E Ratio of Stock =Earnings per share/Market value per share​.

The P/E ratio of the stock market index is the weighted average of the P/E of the companies included in the index.

Generally, a high PE Ratio indicates overvalued market and Low PE indicates an undervalued market.

But the stock market rarely goes up on the basis of index generally it moves up on the basis of stocks.

The PE of small-cap /mid-cap or Large cap may be different. Sometimes PE of the small-cap may be high and large-cap PE may be below.

Source: https://www.bseindia.com/markets/keystatics/Keystat_index.aspx

In the above graph, the red line represents PE and the blue line represents BSE Sensex. At present PE of BSE Sensex is around 28 which is the highest in the last 18 years, it was at this level in 2000 when the BSE Sensex reached 6000 and fell down by 50% in 2000–01. It was around 24 when BSE SENSEX touched 21000 in 2008 and fell down by…60%… …in…2008–09.

Historically whenever PE Crossed 20 level the returns for the next few years was always negative.

On the basis of the historical track record of the last 20 years, we can reach a conclusion that it is the best time to invest in the Share market in a range of 12 TO 15 PE and better to avoid between 25–30 in case of lump-sum investment.

At present, PE is about 31 which indicates an overvalued market.

The second indicator is the market capitalization-to-GDP ratio

also known as the Buffett Indicator introduced by Warren Buffett. If Market Capitalization is high it means share prices are high (As market capitalisation is a product of share price and the number of shares) and GDP is low which means growth in the economy is low, indicating an overvalued market (Prices are high in comparison with Corporate profits) and if it is low which means the share prices are low and the economy is growing ( Corporates profits are high in comparison with share prices) indicating an undervalued market.

Source: https://www.bloombergquint.com/business/chart-indias-market-cap-to-gdp-ratio-above-100

Source:https://www.gurufocus.com/global-market-valuation.php?country=IND

It can help in finding that market is undervalued or overvalued compared to a historical average. If the ratio is between 50 and 75%, the stock market can be undervalued, maybe fair valued if the ratio is between 75 and 90%, and overvalued if within the range of 90 and 115%.

The stock market capitalization-to-GDP ratio of the BSE Sensex was more than 100% in 2007, which was an overvalued market as in the next two years, it fell by about 60%.

At present, it is 118% which indicates an overvalued market.

The third indicator is the Interest rate

as the rise in interest rate means a decrease in corporate profits resulting in a fall in stock prices on the other hand fall in interest rate means an increase in corporate profits resulting in a rise in stock prices. But the rise in interest rate is harmful to some sectors like Real Estate, automobiles as they are capital intensive, IT and Pharma are less affected and the Banking sector is benefitted by the rise in interest rate as they get more deposits.

The rise in interest rate is not beneficial for corporates and the economy as it increases the cost of borrowing resulting in an economic slowdown and if the interest rates are low it increases the spending of corporates and consumers which increases inflation.

So to maintain a balance between growth and inflation RBI controls the interest rate.

Source: https://www.bseindia.com/markets/keystatics/Keystat_index.aspx

Source:https://in.investing.com/rates-bonds/india-10-year-bond-yield-historical-data

In the above graph red line represents the 10-year GOI Securities rate and the blue line represents BSE Sensex, we can observe that fall in interest rates from 2002–04 has resulted in the rise of the market from 2005–2008 and the rise in the interest rate from 2005–09 has resulted in fall in the market from 2008, similarly lower interest rates from 2015–2018 resulted in the rise of Sensex from 2016–19.

Continuos fall in interest rate can result in a rise in the Equity market and a continuous rise in interest rate can result in a fall in the Equity market.

The interest rates have come down significantly and may rise in future because of rising in inflation which may result in a fall in the share market.

All three indicators are indicating that the Indian stock market is overvalued, it may rise further but the possibility of a correction cannot be ruled out. Some profits can be booked.

But apart from historical data, we must also consider that timing the market will be difficult hence better to go for SIP and STP mode through Mutual Funds.

So ultimately it is the rate or valuation decides that what you are going to get in future.

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