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Sensex Is Fairly Valued
Mar 14, 2017

So, the Sensex seems poised to take off...

But wait!

How can anyone be sure it will happen? What if the US Fed or North Korea or some other black swan, were to spoil the party?

Even if our prediction comes true, when can we expect to see Sensex 40,000? From an investor's point of view, there is a huge difference between waiting a few months and waiting a few years.

Alas! These are questions that no one can answer with certainty. The future is unknowable... But we can make educated guesses.

If we look at the historical valuations of the Sensex, one thing becomes clear immediately. The market is not overvalued. Yes, individual stocks are overvalued, but not the entire market.

However, the markets aren't cheap either.

Interestingly, the Sensex P/E hasn't crossed 25 since mid-2008.

If we were to tentatively consider a P/E of 25 as an upper limit, at least in the short-term, we would still get an upside of about 13% from current levels. That's a Sensex level of 33,500.

But if that were to happen in a hurry, it would make the markets overvalued. That would be a cause for worry, not celebration.

That's why we are so focused on earnings growth. The only way the Sensex can make it to 40,000 without entering the bubble zone, is on the back of a sustained earnings recovery.

We haven't seen much evidence of that yet. But we believe a recovery could be around the corner.

Coming back to individual stocks, we believe there are still pockets of value in this market. There are stocks that are clearly undervalued from a long-term perspective. The StockSelect team is in pursuit of one as we speak of their report later this month. Watch this space...

Data Source: BSE

This Chart Of The Day was published in The 5 Minute WrapUp - Sensex 40,000 Coming Sooner than Expected

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