The markets crashed last week, with carnage on Thursday, as foreign funds sold heavily. It is always difficult to predict, which way stocks will move, but at some stage, valuations will have to come into the picture. We believe that valuations are stretched at these levels. However, that is not the only reason, there are plenty of other reasons to stay away from the markets and avoid large-scale buying. Here are some of the reasons.
If you purely go by the Sensex EPS of Rs 1500, markets are trading at 18.4 times trailing earnings. Now, it is important to note that the historic price to earnings multiple for the Sensex companies has been 16 times, which means 18.4 times is higher. This also means that stock prices based on the Sensex p/e maybe at least a good 10 per cent higher. There are many who feel that earnings will grow substantially in the next few years, that will justify valuations. However, we have been hearing that story for many quarters now.
US Fed rate hikes
The US Federal Reserve is set to hike rates in December 2016. In fact, the decision not to hike in September was a close call. Most economists are expecting a sure interest rate hike in the month of December. In simple terms what this means is that money moves from equities to government securities. This is not good news for shares. Investors start chasing higher yields in debt and start to sell shares, when the US Fed hikes interest rates.
Earnings season already disappointing
The earnings season has already been very disappointing. Both tech biggies like TCS and Infosys have under performed. Some analysts foresee the tech sector continuing to under perform. Government owned banks, infra companies and select cement companies may continue to perform poorly. There is no place that really has value, except probably the private sector banking space. However, that space is heavily overvalued and investors have to pay a price for quality and growth.
Foreign Portfolio Investors are selling
Foreign portfolio investors are selling. On Thursday and Friday they sold shares worth Rs 2,000 crores. With worries that interest rates in the US would rise, it is unlikely that they would stop selling. In fact, these set of investors have been consistent buyers for the last few months. There are a host of worries on the global front as well.
Unlikely to be too many interest rate cuts
There is unlikely to be too many interest rate cuts too fast. The RBI already cut interest rates last month and it is unlikely that we will see interest rate cuts anytime soon. There are worries that inflation will edge higher, which will make the Monetary Policy Committee cautious before hiking interest rates.
There are a host of worries on the international front. Data that came out last week, has not been too encouraging. Chinese export data that came in last week, showed that exports had slumped almost 10 per cent. On the other hand comments from US Fed Chair, Janet Yellen, indicated worries over the growth in the US economy. Worries over Deutsche Bank in the US would continue to weigh on markets there.