Russell Napier sees all equity markets falling

Renowned financial historian Russell Napier holds a very positive long-term view on India, but not so in the short term. He is also looking at a global deflation shock leading to a plunge in equities across the world, “which can take the S&P 500 to as low as 400”.

As for Indian equities, they haven’t been cheap for a very, very long period, according to him. “And the best measure of cheapness that I look at is the cyclically adjusted price to earnings (PE) ratio because it has been a good guide in America for future returns,” he said.

“In India, the cyclically adjusted PE is now at 24. If you look at the history of America, that is right at the top end of the range, so suggests that we are going to have pretty poor, lowish returns from India over a prolonged period of time,” Napier said in an interview.

Cyclically adjusted PE is calculated by using ten-year rolling average earnings and Napier believes this number (24) has to fall if Indian stocks are to become an attractive proposition.

“The volatility of the market though is great, and I think -- and I hope -- we will get a chance to buy Indian equities cheaper sometime soon,” he said. “Certainly, if they ever get below 15 times cyclically adjusted PE, you should be looking to buy some of them. And there is every reason to think that they will go lower than that, and then you should be buying a lot of them,” he adds.

Still, he feels he’d rather buy expensive Indian stocks than Chinese. “Chinese stocks are probably at very viable sort of valuation levels. But I wouldn’t buy any of them because I don’t consider them to be corporations. I don’t consider the management to wake up in the morning and seek to push up the return on capital to the benefit of shareholders. And even though those equities are cheap, I don’t fundamentally want to buy them,” he said.

And how is India different? “Not every Indian company as you are also aware is going to do the best for all its shareholders. But because Indian companies come from the private sector, it is more likely you are going to find companies in India who work to benefit their shareholders and not just the small family unit in the company,” says Napier. “Hence when it comes to buying stocks cheaply I want to do that in India and not in China. But in India, at the minute, they remain still very expensive.”