Anybody trying to predict the exact movement of stock markets, is at best trying to play a guessing game. The fact is at best you can evaluate certain fundamentals, liquidity and try to at best guestimate, whether stock prices at these levels are expensive.
Two factors drive markets: one is liquidity and the other is corporate and economic fundamentals. Let us examine these and see if the bull run in the markets would continue.
Are stock prices expensive?
The one barometer that is often used to see if markets are expensive is the Sensex and the Nifty P/E levels. At the moment the Sensex is trading at 24 times p/e, based on trailing Sensex EPS.
This is way expensive than the historical average of 17 times, which means stock prices as measured by this barometer are expensive. The Nifty has now hit a new peak of 10,138 points. In fact, the broader markets are also costly and investors buying into these markets are taking a risk. Having said that there is scope for the markets to go even higher and "liquidity" is a big factor.
Money pouring into mutual funds
Money is simply pouring into mutual funds. For example, by way of SIPs itself money to the tune of Rs 5,000 to Rs 7,000 crores is flowing into MFs monthly.
This is sticky money and is unlikely to go away. Mutual funds are sitting on huge cash and at every dip in the markets, they are likely to buy. What this means is that the stock markets are headed higher, only on account of liquidity and nothing more than that.
In fact, markets should trend higher on the basis of fundamentals, which is not the case currently. The trend right now is Foreign Portfolio Investors are selling and mutual funds are buying.
Fundamentals remain weak, GDP slumps
The GDP for the quarter ending June 30, 2017 slumped to 5.6 per cent. The GVA (gross value add) was also a pathetic 5.6 percent compared to 7.6 percent in June quarter of 2016.
You may blame in on GST and other factors, but, we have been witnessing a structural decline for sometime now. Corporate earnings continue to be poor.
The IT and the pharma sector, which were one the bulwark for the markets have taken a pounding in the last few months. Unless we see a sharp recovery in corporate earnings, it is difficult to justify high stock prices.
Rising inflation a cause for worry
Inflation numbers for the month of August, clearly showed that inflation is heading higher, stoked by fuel and food prices. What this means is that we would have seen last of the interest rate cuts by the RBI as inflation is set to trend higher from hereon. There may also be some cause for worry on maintaining the fiscal deficit of 3.2 per cent as targeted by the government. This is unless the divestment process is expedited.
Will the bull run last?
Bull markets are a combination of liquidity and fundamentals. At the moment, on some aspects the fundamentals are weak, especially corporate results and economic growth.
Private sector investment is also not taking off. The markets are running less on fundamentals and more on liquidity. Once the liquidity dries off, be rest assured the markets could fall. For investors entering the Indian stock markets at current Sensex levels of 32,000 points, the risk to reward is far higher than for somebody who entered the when the Sensex was at 27,000 or 28,000 points.
So, you may want to be a little more careful with the Sensex at 32,300 points.