Everyone knows the BSE Sensex. Everyone also knows this: when the Sensex goes up, it?s good; when the Sensex falls, it?s not so good. But what happens?such as now, for example?when the Sensex does not consistently move in any particular direction? Look closer, then, to make a better-informed judgement on investor confidence. There?s a shorthand indicator for this, an excellent one at that: the market-wide weighted price-to-earnings (P/E) multiple for the BSE Sensex. This P/E ratio can be calculated as easily as that for companies. And tracking the BSE-wide P/E from its peak in 2005 until now shows some surprising results. It has grown steadily. Even impressively. From 16.21 in 2005, it has gone up to 22.44, as on Thursday last week. The ratio is a measure of confidence. Investors tend to look at the P/E ratio as an indication of future market expectations of a company?s growth prospects, beyond what the available earning figures show. For instance, if an investor was willing to pay Rs 16.21 for a rupee earned per share in 2005, he will now be willing to pay Rs 22.44 for the same gain. When the P/E of a company is higher than its industry average, it means either that the stock is overpriced or that the market is expecting a better showing in the future than the immediate figures suggest for the company. The P/E of the BSE Sensex, likewise, would measure the investor expectation of better performance by the constituent companies, compared with the immediate past.
To be sure, the P/E ratio rise of the past few years is not limited to the Sensex. The BSE mid-cap P/E ratio has moved up from 16.29 in 2006 to 19.35 in the same period. The bigger surprises are Bankex and PSU ratios. The P/E ratio of the former moved from 4.75 last year to 19.86 this year, and for the latter it moved up from 3.67 last year to 15.75 as of now. The biggest surprise is in the realty sector, where the P/E moved from 28.79 last year to 45.35 this year, registering a jump of 57%. This shows investors are confident of this sector, despite the slowdown thanks to high interest rates. While stock prices have multiple dimensions, we can definitely conclude from the P/E rise that the stockmarket?s bet on the future remains optimistic.