Thus far foreign investors have invested a staggering Rs 24,000 crores in the last few weeks, which has sparked of buoyancy across the board. Stock markets have been driven by the rally, largely due to ample liquidity provided by the European Central Bank, which has found its way into assets of emerging markets, like India.
The sharp rally, without any serious correction is a cause for concern. The moot question now remains: How far from here?
It's unlikely that the Sensex will gain sharply and small investors are advised caution as valuations seem close to fair value.
For example, if we assume earnings per share for Sensex companies at around 1250, then valuations are at a price to earnings multiple (P/E) of almost 15.
This is more closer to the long term P/E multiple average but is still way above the P/E multiples of developed countries. Hence, at these levels the markets are reasonably valued and a sharp spike in stock prices may not be warranted.
In any case risk to reward has dropped dramatically and hence discretion would be a better part of valour.
Also, there are more headwinds in the form of the impending Greece crisis and escalating tensions between Iran and Israel, which are more than capable of putting a spoke in the wheel for the rally.
For those who had purchased at lower levels in December, it may just be the right time to take some profits off the table.
Having said so, liquidity can sometimes make a complete mockery of valuations and fundamentals.