Sensex at 20k: Time to get cautious?

Sat, 11 May Pre-Open

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Has the euphoria of global stock markets reached Indian shores? Well, the robust gains that Indian stocks have eked out in past few trading sessions do lend strong support to this assertion. Courtesy these gains, BSE Sensex closed above the psychologically crucial mark of 20,000 for the first time this year.

And it certainly doesn't look done yet. The way FIIs are pumping in money hand over fist, the index does look set for a long upward journey. Just to put things in perspective, as per The Economic Times, foreign institutional investors (FIIs) have bought Indian equities worth US$ 12 bn so far this year, a record for the period.

Even the valuations seem supportive of a further rise in the markets. After Friday's gains, the Sensex PE stands at a little over 17 times its trailing twelve month earnings. This hardly looks expensive and when one factors in the fact that we are in a period of cyclically depressed earnings, the multiple looks even more appealing.

What is further adding to the buoyancy is the decline in prices of commodities that perhaps have a negative co-relation with the Indian markets i.e. crude and gold. Since we are mostly a nation that imports commodities, the softening of commodities does indeed augur well for the fundamentals of our economy.

Thus, while things are looking up for Indian equities, investors go overboard at their own peril. The fact that a stock is an underlying piece of a business and not a certificate that you can trade day in and day out, makes it imperative to look at the fundamentals of the business before investing. The company should have a long history of sustained earnings growth and should be run by an honest and a committed management team that gives total respect to minority shareholders.

And lastly it should be available at a reasonable price. For no matter how good the stock, it may not give you attractive returns if not bought at the right price. Therefore, paying reasonable valuations is of the utmost importance we believe.

Please remember there cannot be a worse time than the current one to get carried away by the euphoria all around us. And it is usually during such times that the biggest mistakes are made by investors. Therefore, giving a strong hard look at the business model of the company and also taking into account its valuations should be diligently practiced before taking the plunge we believe.