Is It A Good Time To Invest In Stocks?

The cash pile of equity mutual funds (MFs) has climbed to multi-year highs, amid sharp investor inflows since October. Steep volatility in the markets has made fund managers cautious, awaiting opportunities to deploy the cash.

As per an article in The Business Standard, cash as a percentage of equity assets under management has increased 116 basis points, or by Rs 188 billion on a YoY basis. The benchmark indices have gained more than 10% during this period, while the rally in the broader market has been even sharper.

But, the pronounced bullishness in the stock market could subside in the coming weeks if the fourth quarter results of companies fail to live up to expectations.

Valuations are looking expensive on a trailing earning basis. There is a flush of liquidity from foreign investors, but markets would soon track routine events such as corporate earnings, industrial growth numbers, inflation data, RBI monetary policies, and so on. The market will support the high valuations only if corporate earnings and industrial growth are encouraging. Inflation and the RBI monetary policy should be conducive for this growth.

This is not the first time the markets have been so high. Two years back – around January to March 2015 – it was quite similar. The Sensex spent most of its time upwards of 29,000 and even briefly crossed 30,000.The return is zero over the last two years.

Currently, the Sensex is again perched near 30,000. The index is currently trading at 17.3 times estimated FY17 earnings. Considering the other MSCI indices, India’s benchmark index is today one of the most expensive globally. The trailing twelve month P/E multiple of the Sensex is way higher than the long term average of 18 times.

Having said that unlike in 2008, the earnings of Indian companies are far from their peak. And a steady revival in earnings could well keep the index at lofty valuations. Individual companies, especially mid and smallcaps, though, may not have that luxury. And unless their earnings growth catch up to the steep market expectations in the coming quarters, a sharp correction is inevitable.