MUMBAI: The ongoing rally, with benchmark Sensex crossing the 30,000-mark early this month, and Nifty touching an all-time high, is no exception. But analysts aren’t waving the warning flag yet, asserting that we are at a safe distance from the bubble territory. At the same time, they aren’t ruling out overvaluation of stocks either.
The key reason bothering traders is the price-earnings (PE) ratio, which investors widely use for cherry-picking stocks. Sensex gained over 13 per cent so far in 2017, while the PE multiple is currently hovering at 23, or Rs 23 for every rupee earned by companies in one year. It is way above the 10-year average of 19, but lower than December, 2007’s extreme of 27. However, opinion is divided if the current PE multiple is just froth or a reasonable number.
Higher earnings translate into stronger PE and hence, some believe, a PE of 23 is unrealistic considering flat fourth quarter earnings, indicating weakness behind-the-scenes. Profits for Sensex firms also rose a measly 5.4 per cent annually in the past six years, while markets saw 15-16 per cent growth. “Risk appetite globally is high and volatility indices are low…markets could run into resistance soon, but the time and levels are difficult to anticipate,” Deepak Jasani, Head, Retail Research, HDFC Securities told Express. He added, though the index looks nearing over-brought levels, there weren’t any corrections so far.
There are plenty of pins to prick this over valuation including geopolitical tensions, economic uncertainty due to Brexit, falling commodity and crude prices, and policy developments in the US. “From here, earnings growth will drive markets. With enabling factors like upbeat consumption, earnings from hereon could witness double digit growth in FY18 and thus keep the market sentiments buoyant,” reasoned Pankaj Pandey, Head-Research, ICICI Direct.
Markets everywhere are on the rise. Not one to be an outlier, Indian equities returned 20 per cent, making it one of the top performing emerging markets. But it’s unlikely that this rally is sustainable. Currently, there’s a liquidity flood from foreign and domestic investors that’s propelling stock prices higher. More than equities, the bubble blow up is likely in the debt market, according to Anand Rathi Securities. Bonds and liquid funds have amassed a whopping Rs 4 lakh crore inflows in three years, double than `2 lakh crore pumped into equities, and this will likely burst in 6-12 months. Meanwhile, mid-cap companies, which promise high returns, too are in the game.