The Sensex has crossed several unprecedented milestones before. What distinguishes the new high today from the peak levels five years back, however, is significant. Today, the P/E of the Sensex stands at around 16 times. As against this, the P/E of the Sensex at a level of 5924 in Feb 2000 was around 25.5 times. It is amply evident that this time, the market fundamentals are in order as the valuations are backed by strong corporate performance.
India is a fundamentally strong economy, enjoying the benefits of favourable demographics, growth in credit and consumption and progressive reforms that will further fuel growth for the corporate sector.
From a mutual fund perspective, even as we urge investors not to get carried away, we hope that the new market level attracts the attention of Indian retail investors, whove not benefited as much from this rally as have institutional investors. We believe that there is a clear under ownership of equity assets by the local investors.
As of date over Rs. 17 lakh crore is invested in bank deposits yielding a return, which barely outperforms the inflation at household level. On the other hand, the allocation to equity is insignificant despite it being an asset class, which has outperformed the inflation by a wide margin.
We hope that at the new index levels, the affinity of small investors towards small savings and fixed return instruments undergoes some kind of rerating as they wake up to the fact that India is a strong growth story in the long run.
Most importantly, patience always pays the investor and hence they should look at wealth creation through equities with a long term time horizon. In view of the short term risks in the market like liquidity of FIIs, oil prices, interest rates and possible event risks, direct equity investors must seek to invest time in fundamental research and should be aware of small penny stocks.
Having said that, we would urge retail investors to tread cautiously as there may be volatility in the short term. We would recommend that investors follow a disciplined asset allocation plan and not get carried away with the frenzy of new index highs. We would strongly recommend that investors seeking entry into the market, do so by way of the Systematic Investment Plan offered by Mutual funds as it is an effective way to play market volatility to your advantage.
Managing Director, Prudential ICICI AMC