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Are stock market valuations justified?
Fri, 9 Oct Pre-Open

Where are the Indian stock markets headed now? Has the market correction come to an end? Has the bull rally resumed? Many investors may have this question.

Of course, it would be great if the markets went higher and investors made returns on their investments. But we would like to put forth a counter question: Why should the markets go any higher? Do the fundamentals warrant it?

This leads us to the next question: How expensive are the Indian stock markets now?

The valuations of individual stocks may vary widely. So let's look at the benchmark index. A quick look on the BSE's website tells us that the BSE-Sensex is currently trading at a price to earnings multiple of 21.76. That's at a significant premium.

Why are the Indian stock markets trading at such premium valuations despite the fact that earnings still remain dismal? Recently, we had talked about the dichotomy between the earnings of Indian corporate and the stock market valuations. We had explained that the discrepancy between actual earnings and stock prices was on account of expectations of a strong recovery in the coming times.

At the same time, it is also important to put things in a global perspective.

If you consider the prospects of the global economy, the answers are depressing. Most major economies are slowing down. But it is not the developed world alone that is going through a growth crisis. It is the emerging markets as well. China, the global growth engine, is slowing down after decades of gravity-defying growth. Other major emerging economies like Brazil and Russia are also in a slump.

This leaves India as the lone bright spot in a world that is mostly slowing down.

But will India be able to deliver the promise of growth? We have the highest youth population in the world. But on the other hand, we have a slew of problems and hurdles that hinder us from unleashing our true potential. It is these factors that will eventually determine whether India really keeps the promise of sustained high growth in the coming years.

So while market participants are discounting the promise of a solid economic recovery, long-term value investors must be mindful and never take their eyes off the ground realities.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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