Stock market is fundamentally expensive but rising cash with local investors and continued foreign inflows can take the market further up before a correction, Nomura Financial Advisory said.
?While the market looks expensive, there may be more steam left, before it starts to correct,? the brokerage said. Nomura said Sensex trades at a price-to-earnings multiple of 16.6 times compared with five-year average of 14.6 times. In the past four months, foreign institutional investors have bought a record $14.6 billion while domestic investors have sold $6.3 billion. This indicates that the domestic investors are worried about general economic imbalances and valuations while the foreign institutional investors are chasing relative growth and yield differentials, Nomura said.
?India, with close to 8% nominal yields, has seen a massive divergence from the global government bond markets. So long as global yields continue to signal a poor economic outlook, the yield chase could continue and might, indeed, be bolstered by falling inflation (in India),? it said.
Apart from the rising liquidity, the increase in capital inflow may compel Reserve Bank of India to intervene and buy dollars to prevent damaging export prospects.This move would broaden money supply growth and the rising liquidity thereby, would be positive for banks and real estate, Nomura said. While the broader market has not yet breached its previous peak of January 2008, sectors like automobiles, consumer goods, pharmaceuticals and technology are past its peak. Realty index continues to be the under-performer, followed by telecom and power index.