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Sensex P/E rises considerably in last two months
Oct 26, 2015

Speaking of Indian equities, the last few months have seen some fair amount of volatility in the Indian stock markets. For instance, we witnessed the big crash on Monday in late August. And then there were worried that more correction could be around the corner should the US Fed announce a rate hike.

The rate hike in the US did not happen. And as equities across the world rallied, so did the Sensex. Indeed, as reported in an article in Business Standard, the benchmark BSE Sensex is up 10.4% from this year's low (hit on September 7). This makes it the fourth best performing market in the current rally after the Hong Kong, South Africa and Shanghai markets.

However, it appears that the rally is more a result of expansion in the P/E multiple rather than a rise in corporate earnings. Indeed, the P/E multiple of the Sensex has risen around 12.1% since September 7, while earnings were down 1.6% during the same period.

The next few quarters could see India Inc report improvement in margins as the favourable impact of lower commodity prices begins to take shape. However, for a more sustained pick up in earnings, a mere meltdown in commodity prices is not enough. There will have to be a pick-up in demand, revival in the capex cycle and overall improvement in the Indian economy. For which the government will have to do a lot in terms of implementing key reforms effectively.

Data Source: Business Standard; Bloomberg; BSE

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