Oct 10, 2003|
Indices: Where do you go
The Sensex has gained nearly 39% since the start of the year. Yesterday, it closed just a shade below 4,700 levels. FIIs have invested about US$ 3 bn since January this year. With the economy seemingly in a buoyant phase, one hears talk of the Sensex touching 5,000 plus levels very soon. As a retail investor, what should your approach be?
The Sensex and the Nifty are trading at 15x one year trailing earnings. It is likely that the index companies will together log in an earnings growth of 15% plus in FY04. Based on this the P/E valuation of the Sensex and Nifty works out to be around 13x FY04 estimated index earnings. Considering that the indices have traditionally logged in earnings growth at 17% CAGR between FY97-FY02, the valuations indicate that there may be some steam left in the indices.
However, when there is a rise such as this, a prudent investor, should always look at the risk reward ratio. A level of 5,000 is not very far away (6.4% rise from here on). Sure, the Indian economy does look stronger and the monsoon is likely to rub off on rural consumption going forward, but how much of it is already in the price?
In our view, the undercurrent is still positive and the fundamentals are still falling into place. With the interest rates at low levels, there are not enough avenues for investors to look at. The government too has tacitly encouraged investments in equity, by doing away with dividend tax in the hands of the shareholder, as well as by giving a capital gains benefit on equities bought and held during FY04.
In this light, equities should form a part of every investor's portfolio. How much? Well, that depends on the investor's age and risk profile. To find out more visit our Asset Allocator. For investors that have no access or inclination to research should ideally enter the markets through reputed mutual funds.
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