Earnings versus bond yields (adj for tax) for India
The data series here does not go too far back (really hard to get data in India). But it seems to suggest that earnings yield do not spend too much time below bond yields. Only at the peak of the bull market in Jan 2008 was there a was a large gap where bond yields led earnings yield. But by and large, India could be a risk averse market, where investors will switch to debt (or atleast out of equities) if earnings yield are lower than bond yields.
Now, earnings yield have once again fallen below bond yields, beginning Sep’10, thats when the Sensex crossed its Jan’08 peak. Market has pulled back about 15% since then. From this chart, it appears markets could fall another 15% from here, if not more.
One big reason is – bond yields are set to rise even further. This data ends on 7 March, when the pre-tax bond yield was 7.55% (for 1 year duration, the normally used 10-year doesnt make too much sense here). This could rise 100 basis points in the next 6 months. RBI isnt quite done with tightening yet. Inflation is not going to go away easily, no matter how many statements FM and Montek make. This itself is good for 10% correction in equity markets. Add to this the fast lessening expectations of growth for FY12. Sensex should fall below 17K anytime in the next 6 months, Nifty below 4900
