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Equity Markets Overvalued or Undervalued: My Benchmarks

Buy low, sell high is what everyone wants for investments (equities) where high ROI is being targeted. That gives one a shot at landing up with extraordinarily high returns.

The catch – identifying high and low valuation situations.

With consistency!!!

High decibel pitch mostly highlight latest annual returns while long pull data is mostly mentioned on the sidelines. Relying on short term point to point data will mostly lead to wrong conclusions.

My view: looking at decadal ROI’s and assessing them against a fixed rate low risk benchmark will give one a better shot at forming an opinion on whether prices are low, reasonable or high. And while one is at it, 3 period smoothening (averaging) will still give a better result as it tends to iron out significant outlier events making point to points returns even for long horizons go haywire.  

Circling back to fixing benchmarks. As we assessing performance on decadal basis, I will consider 10 year Indian government bond yield as a reference. If one is ready to hold out these bonds for 10 years, these essentially become risk free investments. The rates for 10 year GOI bonds have varied from low of 6% to high of 9% if we consider past 20 years data. The numbers are approximate but will do the job. Average of low and high yields comes to 7.5%. We now have three numbers with respect to fixed rate and sort of risk free returns:

-          Low: 6%

-          Average: 7.5%

-          High: 9%

My benchmark of markets status assessment: Double the above yields.

Why so? I feel 2X the fixed rate return will mostly take care of:

-          Risk premium (excess return) expected from growth investments, and

-          The taxation advantage offered by growth investments

Going by this logic, these will be my benchmarks for broad based equity indexes, basis 3 period decadal smoothened returns:   

1.      Highly Overvalued: Above 18%

2.      Overvalued: 15% to 18%

3.      Fairly valued: 12% to 15%

4.      Undervalued: below 12%

Going by these benchmarks, where does the market stand as on 31 Dec 2025?

Nifty 500 index three period (10 year) smoothened returns stand at 14.92%. Just knocking the overvalued territory but still not there!!! It is worthwhile to note 1 year performance of Nifty 500 index ending 31 Dec 2025 – 7.76%.

But this is just one data point. Over next few blog posts, I will check the efficacy of this “benchmarking” with few more historical return figures. Stay tuned. 

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