Indian equity markets has been witnessing recent pullback after record-breaking rally. Kotak Institutional Equities analysts in its recent note, pointed out that investors have been ignoring concerns of higher valuations. They believe that greed of returns have overwhelmed fear of risks, whether it is visible or invisible.
"The fact that that the investors have made high returns will mean little in the event of an eventual alignment of stock prices with fair values," analysts remarked. Currently, India is trading at 25.8 price-to-earnings (PE) ratio, much above its one-year average PE of 21.6, showed Bloomberg data.
Whether it is flows towards equity mutual funds from retail investors or overall markets, it indicates high level of greed operating in markets, said Kotak analysts. Moreover, high conviction in price points coupled with limited investment experience of market participants have led to high level of confidence or greed.
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So far, the market have brushed aside all the negative news. Whether it is BJP losing its majority in the lower house of the parliament in 2024 national elections, government raising capital gains tax on equities in the July 2024 budget, Q1FY25 results missing Street estimates, or the Middle East situation deteriorating rapidly, fears of risks have been non-existent, the brokerage firm cautioned.
Given the widening disparity of risk between current prices and fair value of stocks across the board, the odds of correction increases at a time of an untimely risk, analysts warned.
"Stocks have been at inflated levels for a while, which increases the odds of a correction. The driver of a correction could be anything but the outcome will be the same," they added.
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