Valuations surge as Sensex crosses 20,000 milestone

Valuations surge as Sensex crosses 20,000 milestone

By fe Bureau

It took exactly 32 months and six days for the Sensex (^BSESN : 19941.72 -59.83) to reclaim the 20,000 peak. The September rally of over 10% in market indices has been among the fastest in recent times. On Tuesday, while the 30-share BSE Sensex closed 95.45 points up at 20,001.55, the broader 50-share Nifty (^NSEI : 5991 -18.05) gained 28.60 points to close at 6009.05. The last time Sensex and Nifty closed above 20,000 and 6,000 respectively was on January 15, 2008.

For markets, the journey from 20,000 to 20,000 has been quite a roller-coaster ride, with the Sensex plunging to 8,160-levels in March 2009, once the full impact of the post-Lehman crisis hit Indian markets. Early this year, the European debt crisis roiled global markets, impacting India as well. However, strong support from foreign institutional investors - who invested a record $16.2 billion this year - fuelled and sustained a rally in Indian stock markets.

Said Madhusudan Kela, chief investment strategist, Reliance Capital: "The market is likely to rise from current levels with the Indian long-term growth story remaining intact." However, he doesn't rule out a short-term correction, which could be used as an opportunity to re-enter the market. Motilal Oswal, CMD, Motilal Oswal Financial Services was optimistic: "The trend is robust; the undertone is strong. I expect the markets to scale a new high in the current fiscal," he said.

The market valuations do appear stretched, considering that the 2011-12 earnings have already been pencilled in. According to Bloomberg estimates, Sensex is quoting at a price-to-earnings ratio of 15.8 times its 2012 earnings, which is equivalent to its historical one-forward averages. This, in other words, means that it is likely the market will remain sideways as the earnings get tracked avidly. In relative terms, other Asian markets are relatively underpriced. The next-year forward earnings are relatively lower for markets in South Korea (9.3), Taiwan (12.3), China (12.7), Indonesia (13.7) and Hong Kong (12.3).

There are concerns if strong FII inflows will continue. "Money is simply coming in from countries like the US into emerging markets like India. So long as the US economy doesn't recover considerably or collapses, these foreign funds have an attractive arbitrage opportunity if they put their mony into emerging markets," says Sashi Krishnan, chief investment officer, Bajaj (BAJAJAUTO.NS : 2101.05 0) Allianz Life Insurance. In the year so far, India has got roughly 45-50% of the overall Asia allocation ex-Japan and China. This is much higher than historical figures.

However, support from domestic institutions has been lacking. In the last 32 months, while FIIs have bought $21 billion on a net basis, mutual funds have actually sold $2 billion. "Selling has happened primarily because they feel the valuations look a bit stretched," says Krishnan. He adds that while domestic institutions usually counter-balance FII inflows, this time higher FII inflows have muted the influence of domestic institutions.

Though the market touched its 32-month high Tuesday, the rally was lacking in breadth, with only 14 of the Sensex stocks advancing. The overall market breadth was also negative, with more than two stocks declining for every advance.

Some technical analysts expect tough times ahead. "It's extremely unusual for the markets to continue these types of breakouts without some correction," said Brandon Wendell, senior instructor and trader mentor instructor at Online Trading Academy: "You can't keep climbing if everyone has already bought." He said he was concerned about major decline in small-cap stocks. "Usually, a divergence of small-caps signals a correction and even reversal of trend," he said.

The biggest Sensex gainer was TCS, which rose 4.63%, followed by IT peer Wipro (WIPRO.NS : 439.65 +4.35), which gained 3.41%. Tata Power advanced 3%, while Tata Motors (TATAMOTORS.BO : 1077.4 +21.2) gained 2%. The biggest index losers were ITC, which fell 2.18%, followed by JP Associates which declined 1.36%. DLF, Reliance Infra and Jindal Steel (JINDALSTE.NS : 704.85 +1.15) all fell over 1% each.

Source: http://in.biz.yahoo.com/100921/50/bawa42.html