Why investing at Sensex levels of 19,300 is not appealing?

Updated: Saturday, December 15, 2012, 10:48 [IST]

Okay, everybody seems to be bullish as never before and there are some higher Sensex target levels being predicted by all and sundry. Some are predicting 23,000 Sensex by Dec 2013, while others have targets of more than 21,000 for the Sensex by mid of next year, almost convincing investors to invest.

But, investors would do well to look before they leap. In the next one year things are more uncertain then ever before. The euphoria over reforms is likely to die down and the 2013-2014 Union Budget to be unveiled on Feb 28, 2013 is likely to be a populist one considering that it would be the last budget before the elections due in 2014. That is of course, if Mayawati and Mulayam Singh Yadav do not pull the plug before that.

In any case, a populist budget would put pressure on the fiscal deficit and hence a threat to India's sovereign rating.

The Sensex has already rallied around 26 per cent this year and even it were to go to 22,000 levels by Dec 2013, it would be slightly higher than 10% from here. Now, for a marginal return like that, the risk is not worth taking, considering that you can still get 10% in fixed income yielding returns without too many risks.

The price to earnings ratio of Sensex companies at the current Sensex levels would also be 14 times forward earnings, which is more or less close to long term average, leaving limited room for a sharp upside.

Fiscal deficit remains an area of serious worry and the sticky inflation is unlikely to go away easily. This will restrict the RBI from an aggressive rate cut, though, there is likely to be a few rate cuts in 2013.

Things across the globe are unlikely to heal anytime soon. Greece remains a strong case for a eurozone exit, spelling doom for the region, while the fiscal cliff in the US remains a worry.

Overall, it seems a risky proposition to invest at current levels given that shares have rallied over the last few months and those who enter now have to buy at higher prices. The risk to reward ratio is certainly not in favour of those who plan to invest at current levels.

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