Markets have been seeing a spectacular run in the last few months. In fact, three weeks ahead of the Union Budget 2018, the markets are at a historic high.
At the moment there are two worries for the market: one is the valuations and the other is the long term capital gains on shares, which could be a possibility in Union Budget 2018.
Let us examine the first. The Sensex is trading at a p/e of 25 times, which is based on the trailing EPS. This is terribly expensive and is nowhere close to the long term average of 17 times. This has to be the biggest fear for the market ahead of the Union Budget.
The second fear apart from valuations would be the possibility of Long Term Capital Gains (LTCG) on shares. At the moment there is no LTCG on shares, while other asset classes like real estate and gold attract long term capital gains. There is clearly a discrimination in favor of equities.
Again, long term definition for the purpose of taxes is also in favour of equities. For example, long term in the case of equity is defined as a period above one year. On the other hand in the case of gold, real estate etc., it is defined as three years.
Should this change, we would see some reaction in the markets. The other worries include expanding the fiscal deficit, and a populist Budget.
In any case, markets at the moment are over priced and it is best to stay away from the markets.