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Home / News / India /  Monarch AIF draws parallels between Indian stocks and 1960s Nifty50 bubble in US

Monarch AIF draws parallels between Indian stocks and 1960s Nifty50 bubble in US

The Nifty 50 stocks in the USA were a group of fast growing but expensive companies in the 1960s such as McDonalds, International Flavours and Fragrances and Walt Disney.

  • In 1972, the US Nifty 50 had an average trailing twelve month PE of 42 times, more than twice the prevailing 19 times PE of the S&P 500.
  • At least 55 large Indian stocks have an average PE that is even larger than the US Nifty Stocks at 84 times.

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Mumbai: Monarch AIF, an alternative assets manager in India raised concerns over the valuations of ‘quality’ Indian stocks and drew parallels to the bubble in Nifty 50 stocks in the USA in the 1960s. The Nifty 50 stocks in the USA were a group of fast growing but expensive companies in the 1960s such as McDonalds, International Flavours and Fragrances and Walt Disney. They carry the same name as India’s benchmark Nifty 50 Index but they have no connection to the Indian index.

Mumbai: Monarch AIF, an alternative assets manager in India raised concerns over the valuations of ‘quality’ Indian stocks and drew parallels to the bubble in Nifty 50 stocks in the USA in the 1960s. The Nifty 50 stocks in the USA were a group of fast growing but expensive companies in the 1960s such as McDonalds, International Flavours and Fragrances and Walt Disney. They carry the same name as India’s benchmark Nifty 50 Index but they have no connection to the Indian index.

“The Nifty 50 popularity among institutional and individual investors sparked a radical shift from “value" investing to a “growth at any price" style of investing. One of the most important reasons for the popularity of these companies was that they had strong business franchises which would earn them high returns on capital for the foreseeable future. Also, they were displaying an above-average growth track record," said the Monarch newsletter. 

“The Nifty 50 popularity among institutional and individual investors sparked a radical shift from “value" investing to a “growth at any price" style of investing. One of the most important reasons for the popularity of these companies was that they had strong business franchises which would earn them high returns on capital for the foreseeable future. Also, they were displaying an above-average growth track record," said the Monarch newsletter. 

It further added that in 1972 the US Nifty 50 had an average trailing twelve month PE of 42 times, more than twice the prevailing 19 times PE of the S&P 500. According to the AIF manager, 55 large Indian stocks identified by it (with market cap exceeding 5,000 crore) have an average PE that is even larger than the US Nifty Stocks at 84 times. This average PE is far above the 25 times trailing PE of India’s Nifty 50 Index. Over the 10 years following 1972 the US Nifty 50 underperformed the broader market. For example McDonalds stock delivered a return of 1.75% CAGR over the next 10 years. Walt Disney gave a return of -3.78%. Over the longer term however, these differences got ironed out. For instance, the return of McDonalds over the next 40 years was a respectable 12.17% and Walt Disney delivered a 9.12% CAGR. Nonetheless investors endured a long and painful period of underperformance.

It further added that in 1972 the US Nifty 50 had an average trailing twelve month PE of 42 times, more than twice the prevailing 19 times PE of the S&P 500. According to the AIF manager, 55 large Indian stocks identified by it (with market cap exceeding 5,000 crore) have an average PE that is even larger than the US Nifty Stocks at 84 times. This average PE is far above the 25 times trailing PE of India’s Nifty 50 Index. Over the 10 years following 1972 the US Nifty 50 underperformed the broader market. For example McDonalds stock delivered a return of 1.75% CAGR over the next 10 years. Walt Disney gave a return of -3.78%. Over the longer term however, these differences got ironed out. For instance, the return of McDonalds over the next 40 years was a respectable 12.17% and Walt Disney delivered a 9.12% CAGR. Nonetheless investors endured a long and painful period of underperformance.

Monarch AIF identified a list of ‘scary super quality stocks’ including Avenue Supermarkets, Asian Paints, Relaxo Footwares, Page Industries and Indian Energy Exchange Ltd. Even with aggressive assumptions on earnings growth such as 20% EBITDA (Earnings before Interest Taxes Depreciation and Amortization Growth), Monarch AIF said that 44 out of the 55 ‘quality’ stocks identified it would give returns below 10% over the next 3 years.

Monarch AIF identified a list of ‘scary super quality stocks’ including Avenue Supermarkets, Asian Paints, Relaxo Footwares, Page Industries and Indian Energy Exchange Ltd. Even with aggressive assumptions on earnings growth such as 20% EBITDA (Earnings before Interest Taxes Depreciation and Amortization Growth), Monarch AIF said that 44 out of the 55 ‘quality’ stocks identified it would give returns below 10% over the next 3 years.