Buy, hold or sell?

Fundamentals provide another different angle. PEs of Indian benchmark indices are at some 25x on TTM basis and around 22x FY10E. On any given parameter, the market is surely expensive. If you think PE ratio was an outdated method to gauge market, consider my other favorite - 'Q' ratio designed by James Tobin of Yale University. It's a ratio derived market capitalization by the networth of the companies. The ratio currently stands at around 3x, indicating market capitalization is around 3 times networth of the companies. The ratio is adjusted for all the QIP issues where deleveraging has taken place and earnings since March '09. Even the Dow is expensive using 'Q'. Some experts of the US market say Dow is over 40% overvalued and in bubble zone. The other ratio to look at is Cape (cyclically adjusted PE) - adjusted for inflation over 10 years. The conclusion is the same.

Having said that here are a couple of other dynamics that influential people are talking about. First, there is so much liquidity in the market. Too much money is chasing limited paper. So, there is no problem as of now. Second, Indian economy is the next big thing, so Indian equity market premiums should now be more in line with developed markets. Multiples will now be trading in a 20+ band one year forward from the 15+ that Indian equity market has received till date. That's a good sign for India. But, is it too much, too fast? Finally, another bubble is already ready to burst. There is no real recovery in the world economy. Numbers are being manufactured and unemployment continues to remain high.

The conclusion therefore is not all that simple. If you are a long term investor, India is the place to be. Buy. If you are a short term trader, the trend is your friend. Sell.

Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.