The Nifty 50 has broken past the 10,000 mark in style.
But that does not mean that the champagne party will continue forever. While the liquidity-driven rally is continuing, thanks to domestic investors pouring in large sums of money through SIPs, investors must not throw caution to the winds.
At the 10,000 mark, the common valuation yardsticks we use to measure the expensiveness of stocks has gone quite high, and is over past valuation averages by a stretched mile.
The Nifty (NSE-50) has breached the 25 PE mark.
That means that Nifty stocks are now closer to bubble-market valuation zones.
At these prices, the Nifty stocks are beginning to turn way too expensive. During the heady days of 2008, just before the Lehman crisis blew the lid off the markets, the Nifty reached a peak valuation of 28.4 times earnings.
So far, the markets are not near that zone, but the bellwether is very near those levels in the market. If earnings continue similarly, PE ratios could easily edge nearer 28 PE.
If stocks rise another 10-12 percent, the markets could easily hit the bubble valuation zone of 2008. If the Nifty touches 11,200, the PE will hit 28 times mark.
However, a sharp increase in earnings this season could drive down valuations. Many Nifty companies have yet to report earnings. Earnings growth so far has been a mixed bag, with some companies reporting better-than-expected earnings increases, while others have fallen behind expectations.
At present, the Nifty is way beyond past valuations. At this stage, investors will have to tread cautiously since stocks could unwind as punters go in for profit booking.
All eyes are on the unfolding earnings season, however. If all goes well, and marquee Indian companies report good net profit growth, the market’s valuations could simply slide back to the above-average valuation zone of 20-22 times.
That is to say, equities at this juncture appear reasonably priced, which means investors could once again resume purchases.
For now, it seems long-term investors should take a breather, and wait for the market to cool down.
