In Equity market- narrowing earnings yield spread may hint it’s time to buy

 The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
TULSIDAS DUBEY-EMBA 2015-18, Vinod Gupta School of Management, IIT Kharagpur

The earnings yield is defined as inverse of the price-earnings ratio. In theory, if the earnings yield is higher, stocks may be considered undervalued relative to bonds.
Example:
If the trailing earnings yield is 4.94 per cent while the bond yield is 7.77 per cent. The difference between them has dropped to 284 basis points, which is lowest since March 2015, according to the data from Bloomberg.
Our Indian equities are looking attractive going by the current spread between the Sensex earnings yield and the yield of the 10-year treasury bonds. The earnings yield spread of the Sensex relative to the treasury yield is narrowest in five months following a 7 per cent drop in the Sensex in a month.
The investors are very keen on India. A number of them are quite bullish on India and many of them are very optimistic, but cautiously so, because they want Indian reform story to go on and they do not want domestic constraints of India’s politics at some stage to block that story
Foreign investors are quite keen on India and are rather optimistic on its economic prospects, but political impediments to reforms could dampen their interest .India’s economy is likely to expand by a faster clip this year than last year’s 7.3%, and the government aims to catapult this growth rate to double digits.

Despite global headwinds, analysts on Dalal Street are also confident that India should be able to revive its GDP growth in the coming years and outperform other emerging market economies (EMs).

India is expected to become a $4-$5 trillion economy in 7-10 years. It is a near $2 trillion economy at present. This kind of economic growth is bound to find a reflection in stock markets, and equities might just be the right choice to ride the momentum, say experts.

So Equity as an investment or an asset class is going to give significantly better return from risk- reward perspective.

Source :
1. Economic Times
2. Times of India
3. Stock Market review
4. NDTV Stock market watch.
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