India’s benchmark stock market indices have risen by more than 17% in the current financial year. The benchmark BSE Sensex currently trades at a forward PE of nearly 17 times, which is very high by historical standards. Whether this exuberance is justified is a million dollar question, with the experts’ opinions divided on both sides.
Mean reversion theory states that the markets will revert to the mean return in the future. Experts believe that the market is currently one standard deviation above the mean. Hence, are we in for a correction?
Several brokerages and analysts say that the recent surge in the stock markets has come on the back of a number of domestic factors. Primary among them is the expectations of a recovery in the corporate earnings. On the other hand, the Indian Meteorological Department has forecast that the country will receive ‘normal’ monsoon this year with the total projected rainfall at 98% of the long-period average. This was met with cheer by the investors.
Mahesh Patil, Co-CIO, Birla Sun Life AMC, in a recent interview to CNBC TV18, suggested keeping a watch on Individual smaller sectors and domestic business focussed companies, where the earnings growth outlook could be much better than some of the broader market indices. “We have identified a few sectors that we have identified from a long-term perspective, such as consumer discretionary, NBFC (non-banking finance companies), metals – which has seen a decent price increase in the last one year,” Patil had said.
Although, the movement in the stock market seems to be ridden with uncertainty, with the crucial 10,000 level still elusive on NSE Nifty. Anish Tawakley, Head of Research at ICICI Prudential AMC, believes that the abnormal returns have been made, and the returns going forward are likely to relatively modest. In a recent interview to ET Now, he surmised that the broader economy is still not booming, and there’s an indication of overvaluation. According to him, there is very little room for expansion and the returns should follow the earnings growth trajectory going forward.
Independent analyst Anand Tandon said to ET Now in an interview that the upcoming GST (Goods and Services Tax) is likely to be disruptive, hence, the markets may take a pause. Experts believe that the GST will be a huge disruptor and the markets will take some time to gauge the impact. Another independent analyst Ambareesh Baliga cautions investors about the impending disruption, which he expects to be brought about by the implementation of the GST.
Given the bullish prospects of strong corporate earnings and monsoon rains boosting rural incomes, it would be fair to conclude that the long-term outlook for the Indian equity markets remain positive, but investors must remain cautious about a possible correction arising out of stretched valuations or disruption caused by GST.