Are markets on the verge of a crash?

Market price to equity (P/E) is one of those parameters that the market participants look at to gauge the market sentiments. Having said, Nifty P/E has recently made a high of 33.26 from October 2000 to September 2020. Hence, does it suggest that a market crash is on its way? We shall find out in this article.

As we can see from the above graph of Nifty P/E, it’s presently above the two-standard deviation. In fact, even in the year 2007-08, when the great financial crisis prevailed, the P/E was 28.29 before the market crashed. So, does it mean that P/E above 30 indicates a crash? Not at all! During the Harshad Mehta scam in the year 1992, it was well above 50. Hence, going just by P/E multiple is not a great idea. The range would change as the market evolves.

Further, solely depending upon the P/E doesn’t help much. In fact, it lacks timely decisions and sometimes gives delayed decisions. Therefore, to take tactical calls, you need a bit sophisticated tool such as DSIJ’s proprietary tool namely Equity Sentiment Index, which is primarily used in creating Mutual Funds portfolios for our MF Power product. This index combines P/E with few other parameters.

Now, this shows a much better picture, unlike P/E, wherein you might have ended being 100 per cent in debt mutual funds. Also, as you might have witnessed, our equity sentiment index has given timely calls in major financial crises such as the dot com bubble in the year 2000, the global financial crisis in 2008, and ever since 2018, we were underweighted on equity mutual funds. In the current scenario, booking profits from the accumulations made in equity mutual funds after the recent fall in March 2020 would be a prudent strategy. Having said, only time will tell whether the markets would crash or move into a correction.