Tread With Caution

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Interest rate scenario is not uplifting for quite sometime with rates on the fixed deposits, the favoured saving option prevailing at around 5%, that doesn’t even protect against the inflation rate.

Investment in equities is, therefore, being considered the best savings option available.  Millions of new investors have ventured to equity market either by purchasing shares or through mutual funds. The first-time young investors are looking for quicker and higher returns.

The sensex, the Bombay Stock Exchange’s Sensitive Index has more than doubled within the last 18 months from 27K to 60K, powering the Indian stock market into the world’s sixth-biggest stock market. Foreign funds are also pouring into Indian stock markets.

The question being asked is whether this party will sustain. Are markets going crazy?What is the reason behind this euphoria in the stock market? Does it mean that we are out of woods on the growth front?

The fact is that the expected double-digit growth this year, fast pace of vaccination, corporates’ better performance, booming foreign trade, higher revenue collections and governmental support in the form of Production-Linked Incentive (PLI) and disinvestment have raised the level of optimism despite a slump during and before pandemic.

But the present valuation of Indian stock market is 1.3 times India’s GDP, which is uncomfortably high, as the GDP growth of 20.1% for Q1FY21-22 must be viewed in perspective of a low base of previous year, when the economy actually shrank.

Anybody with a very short perspective of 4 to 5 months may take advantage of the present world-beating rally.

However, looking to the fact that the average P/E (price to earning) ratio has crossed 27, leaving little room for upside; investors, particularly small and retail ones, need to tread with caution, as corrections can take place at any moment due to global cues, growth scenario, general sentiments or any unseen developments.

–Kaushal Kishore