Foundation
The math of the multiple
The market has paid a multiple of 17-25 x trailing earnings for Indian equities since Lehman moment of 2008
The presumption is that Indian GDP growth will be greater than 8% a year, that corporate earnings growth will be 2x of GDP, 16 % a year, and since the "free float" or tradeable Indian equites are a little more than half the shares outstanding an Indian "premium" is built in.
So the algorithm
pe = +8 (gdp) *2 (egs) =16 * 1.25(indian premium) =20
But What If ?
Holding GDP constant (a stretch but ok) and egs= 10 then pe = 12.5
Yup linearly a 50 % reduction
Interestingly this condition has existed for several quarters of earnings since the June quarter of 2014 annual earnings growth has declined from 15% to 7 % while pe has expanded from 17x to 23 x
Multiple expansions tend to appear when the expectation is that earnings will increase for whatever reason
They tend not to happen at the end of liquidity cycles (2008-2016, Lehman to Trump) but at the beginning
It appears that the great anesthetic, denial, has been in ample supply
The math of the multiple
The market has paid a multiple of 17-25 x trailing earnings for Indian equities since Lehman moment of 2008
The presumption is that Indian GDP growth will be greater than 8% a year, that corporate earnings growth will be 2x of GDP, 16 % a year, and since the "free float" or tradeable Indian equites are a little more than half the shares outstanding an Indian "premium" is built in.
So the algorithm
pe = +8 (gdp) *2 (egs) =16 * 1.25(indian premium) =20
But What If ?
Holding GDP constant (a stretch but ok) and egs= 10 then pe = 12.5
Yup linearly a 50 % reduction
Interestingly this condition has existed for several quarters of earnings since the June quarter of 2014 annual earnings growth has declined from 15% to 7 % while pe has expanded from 17x to 23 x
Multiple expansions tend to appear when the expectation is that earnings will increase for whatever reason
They tend not to happen at the end of liquidity cycles (2008-2016, Lehman to Trump) but at the beginning
It appears that the great anesthetic, denial, has been in ample supply
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