How long will the journey of the bull continue?

Markets have been soaring at a high pace and will continue to do so for the next few months as liquidity is here to stay, say experts.

Is the market overvalued? Experts’ say that the factors that determine a strong equity market, which means good liquidity, is already present in the Indian market. If this kind of flow continues then the market will be headed to even higher levels, with majority of them saying that it does not bother them that the markets are overvalued with a few even expecting a correction.

So whether the markets are over-valued or under-valued will have to be decided by individuals.

Economy with GDP growing at 8%, interest rates reasonably low, inflation under control despite commodities moving up, positive FII approach with twenty registrations in a month, domestic liquidity scenario looking positive, markets discounting crude till USD 65-67 and expecting not to go beyond USD 70-75, weakness in dollar, are all factors that determine a robust equity market and this in turn would pull in more FIIs and hence more liquidity.

The Sensex just took nine trading session to reach the 11,500 mark from its previous 11000 level today. It was the biggest intra-day gain for the Sensex since September 26, 2005.

Ride on this bull market but stick to good quality midcap stocks rather than frontline that are over-valued, say experts.

Strong liquidity can even make the market trade at an irrational high PE of 19-20

Rajen Shah, Angel Stock Broking, “The view on the market continues to be bullish because money flows will drive the valuation up from here. Last month we saw almost Rs 10,600 crore being pumped in by FIIs and mutual funds. If this kind of flows continue then the markets will be headed to even higher levels. Liquidity is driving the market and will continue to drive it further up.”

Shah says that if liquidity is strong then market can trade at an irrational high PE of even 19-20 because momentum can go on for a very long time.

“When one sees the PE ratio, the markets are fully priced and moving into a territory, which could be mildly overpriced. I don’t take it that way. Going by the book, market could be fairly priced. But liquidity can keep the markets at a much higher PE for much long. If liquidity is strong then we might see a PE ratio of even 19-20," Shah says.

He further adds, "Today at 11,500 the markets are trading at 16 times forward earning, now the earnings yield, which is inverse of PE ratio is 6.25 and the interest rate is also 6.25. Book value says that the market is fairly priced, but markets do not follow this and has its own logic.”

Giving an example Shah said that the Japanese market traded at a very high PE between 1980-1988, then finally peaked out and saw a subsequently bearish market for 16-17 years.

The kind of money mutual funds made basically came from retail investors. Equity in India is under-owned, so higher the market goes the more is the retail participation and more funds will come from domestic funds.

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