Markets
Stock market in India continues to hit new highs. With the US government reducing interest rates, lot more international money is finding its way into India. Even after SEBI clamped down some of these funds, like the Participatory Notes, funds inflow into India continues to remain strong. Business conditions have not changed that dramatically over the past few weeks, it is just investor’s willingness to pay more for the same businesses. Infact, businesses for interest rate sensitive areas like auto, etc have weakened over the past few months.
Key question that one needs to address is whether markets are too stretched that one may see a sharp correction in the near future?
Valuation of the market as a whole has broken out of the historical ‘normal’ range observed and moved to a zone that has been seen only during sharp bull runs like 1993, 2000 periods. Historically in India, markets tend to trade in the range of 12-18X earnings. Current valuation multiple have reached close to 22X. Having said that, market valuation is still lower than peaks seen during other bull markets like 1993, 2000, etc. (anywhere in the region of 28-40X).
The current bull market has also been led by a select set of stocks like Reliance, power stocks, power and engineering equipment and some property companies. A significant large part of the market has not really seen any dramatic moves and valuations are still reasonable there.
Among the smaller companies, valuations are infact quite attractive. The average small & mid sized company in the portfolio trades at almost a 70% discount to the market with very healthy growth rates and profitability levels.
Based on the above, though markets are trading above normally justified levels, one may continue to see the momentum last for some more time before it corrects sharply. One also needs to take appropriate action as and when we reach a stage like that.