The Sensex has shed almost 1,400 points since hitting a record high of nearly 32,600 points, while the Nifty has dipped from levels of 10,100 points to the current 9,765 points. The big reason for markets going higher is the fact that mutual funds in India have an abundance of liquidity and they are pumping this money into equities, which are now rallying. But, fundamentally the markets are clearly overpriced.
Nifty p/e at 20 times
The Nifty Earnings Per Share (EPS) is projected at around Rs 490 for 2017-18. This takes the p/e based on the current Nifty levels of 9,765 points at 20 times. This is much higher than the long term average of 17 times. Most other Asian markets do not get this kind of discounting and India is known now to be the most expensive market by a distance.
This means we now have to see some reaction in equities for reasonable prices to emerge. The problem right now is that there is no sector that is leading the earnings growth. While once it was the pharma and IT sector, both are now laggards. Pharma companies have been badly hit by US FDA and margin pressures from the US, while IT is facing several difficulties of its own.
Same old story of earnings revival
We are now listening to the same old story of earnings revival from analysts, while none is happening. The quarterly results gone by have been muted. Some sectors like the PSU banking space, has performed even worse than one would have expected. Forget the pharma and the IT space. At the moment, apart from the metal space, it is difficult to see from where earnings revival would happen. Probably, the only other space would be the private banking space. With interest rates at its lowest in several years, we are still not seeing any signs of revival at the moment.
FPIs are now beginning to sell
Foreign Portfolio Investors have now begun selling in a big way. Between August 9 and August 22, they have sold staggering sums of almost Rs 11,000 crores in the equity markets. This has led to sharp declines in the Sensex from levels of 32,600 points on the Sensex to the current levels of 31,300 points. Domestic institutions led by mutual funds have been able to absorb large parts of this selling pressure, but, they might not be able to sustain the same for too long.
Sell on rallies
It would be a good idea if investors sell stocks on every rally. Volatile political situation in the US, North Korea worries and slowing corporate growth in India is a cause for worry.