Risk on rally returns; will it last though?

Investment

oi-Sunil

By Sunil Fernandes

Published: Friday, November 8, 2013, 8:51 [IST]

The herd mentality in stocks continue. In Sept when the currency went into a tailspin, and the Sensex hit 17,500 points analysts were quick to reduce targets on the Sensex to 16,000 points.

A couple of months later when the Sensex has hit a new peak in excess of 21,200 points, these analysts say that it would hit 24,000 points by the Month of May. When the markets fall, targets are reduced lower and when they rise, they are increased higher.

In fact, a leading foreign investment bank has pegged the Nifty at 6900 points, around 15% more then the current levels.

The whole point is that not one single analysts can with certainty say where the markets will be six months from now. We are living in such dynamic times, that things change quickly. Investors should not be naive. Remember, the Sensex is at near historic highs and pumping a lot of money at these levels could be highly dangerous.

Also, fundamentally stocks are looking highly valued. For example, the one year forward price to earning multiple for the Sensex is around 17 times, which is much higher then the last few years average.

Areas to avoid

Software, pharma and FMCG have run up sharply pulling the Sensex and the Nifty higher with it. However, it's clear that companies from the sector have become horribly expensive. Of course, they are fundamentally sound companies, but, the question is can you keep paying any price for a fundamentally sound company. Therefore, neither the dividend yield of some companies from these sectors, neither the price to earnings nor the price to book value levels for companies in these sectors look attractive. It's best to avoid them.

On the other hand one can look at some fundamentally sound companies like NMDC, which is a debt free company with high dividend payouts and huge cash reserves.

Clearly, it's time to pick and choose and avoid buying in large quantities.

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