7,500, and ticking... - Views on News from Equitymaster

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7,500, and ticking...

Jul 26, 2005

The bulls refuse to take a break on the bourses as they continue to power ahead with all their might. This saw the Sensex achieve another lifetime high yesterday as it crossed the 7,500 levels! However, it must be noted that there has been no such macro economic improvement or India Inc.'s development that could warrant (even remotely) such a sharp rise in the indices over the past few weeks. However, the fact is that the markets have been entering newer zones everyday, much to the disbelief of even the most seasoned of market players and proving many of them (including us who continue to advocate a correction) outright wrong. The biggest reason, as should be well known by now, is that it is sheer liquidity that has been driving the markets to dizzying heights. While FIIs have been pouring money into Indian stockmarkets as if there is no tomorrow, the re-emergence of domestic mutual funds' interest in the stockmarkets at the current levels has taken us by surprise. It must be noted that domestic MFs have been consistently booking profits since 6,700 levels on the Sensex and have been seemingly awaiting a correction for a re-entry. However, considering that a correction has eluded the Indian stockmarkets for so long now (12 weeks already), the domestic fund managers seemed to have had enough of a wait-and-watch game. This has seemingly 'forced' them to re-enter markets at near 7,400 levels as is evident from the fact that MFs, which had been net sellers for almost 8 weeks in a row, turned net buyers last week! We wonder if it is the most opportune time for MFs to have become net buyers?

While this rally may not seem dizzying to the bulls on the streets, it sure does make us nervous of how long can this 'euphoria' sustain. So much so is the influence of the FII money inflow and the consequent rise in the markets that it has actually forced many investors to doubt their own capabilities. This has seemingly seen many investors (like the domestic MFs), which were probably bearish at 6,500 or 6,800 or even 7,000 levels, turn bullish on the Indian stockmarkets in recent times. But then investors must remember that such a move could be detrimental to the health of their portfolio.

In fact, in such times, it is all the more important to keep control over your emotions and not get carried away with the wind. There are some other points also that investors must strictly adhere to at the current juncture:

  • Do not follow the herd (mentality)

  • Remember, markets can remain irrational for longer than you can remain solvent

  • A greater fool theory has to end somewhere. You do not want to be the last fool, do you?

  • As Warren Buffet believes, it is better to let go off a big (probable) payoff for a certain payoff

Note, the Sensex is currently trading at almost 17 times its trailing 12-month earnings, which in itself seems fairly valued at the current juncture. However, it must be noted that since Sensex is the composition of a basket of stocks, some of which may be very lowly valued and some of which may be trading at absurd high valuations, it may not depict the true picture. This is because, while its multiple would remain artificially low owing to low P/E stocks like those of steel and banks, some others like pharma and software may make it artificially higher. Of course, here we do not intend to challenge the credibility of the Sensex, it's just that investors should not base their investment decisions on the index as a barometer alone.

Going forward, while there is widespread belief that any correction would be short-lived as there 'seemingly' is tens of billions of dollars waiting on the sidelines to make their way into Indian equities, the question that one should ask oneself is that whether is it worth investing in stocks, which are richly valued. Just because FIIs are pouring money into stocks and almost everything is going up, it does not justify buying at current levels across most sectors and stocks. Believe it or not, fund managers and analysts alike are surely having a tough time finding those under-valued or at the most, stocks with some value on the table. A mutual fund closing its scheme (although temporarily) for further investments is not something that is visible often. There is definitely something to infer from this. Thus, to conclude, while everything is going just fine as of now and market movers once again believe that 'it's different this time', one can only pray that the markets keep ticking and are not a ticking time-bomb!

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