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Thursday, January 17, 2013

Will the market hit 23000 in 2013 ?

Even at 20,000 the benchmark BSE Sensex is nowhere close to its historical peak valuations of around 22 times earnings. The last time it came close to these valuations was in 2007 and 2010. But this time around a considerable rise in earnings growth shows an upside in valuations even at Sensex 20,000 levels. No wonder, global fund managers see 2013 being a fabulous year for emerging markets like India. But there cannot be anything riskier than considering these opinions to be all encompassing. Learn 10 steps to Profitable Trading in Stock Market for US Investors

The Sensex' rise up to near 20,000 levels has been driven by just a handful of sectors. Prime amongst them being realty, FMCG, consumer durables, auto and healthcare. Now, one can argue that evergreen sectors like FMCG and healthcare tend to find favour when the going gets tough for the economy. But the earnings of realty and auto sectors are not just cyclical. They even react sharply to fall in economic buoyancy. The realty sector in particular also carries the burden of high leverage. This can be poison at a time when cash flows get strained. Anchoring to the possibility of lower interest rates fuelling demand can only take realty and auto sector valuations so far. In fact at price to earning (P/E) valuations in excess of 20 times, we believe investment in each of these sectors warrant caution. Nevertheless a careful look at long term fundamentals could help investors hunt bargains even in these sectors. 

 Note: The PE multiple for BSE Healthcare Index is steep due to the extraordinary losses incurred by Dr Reddy's and Sun Pharma which impacted the sector's trailing 12-month earnings.

 Whether or not 2013 turns out to be a fantastic year for Indian stock markets, valuations will eventually run the course of reversal to the mean. Hence use 'margin of safety' to guide you in both directions. Not just in selecting 'what to buy' but also judging 'when to sell'. 

Source Google Finance.

 The market has reached where it was 2 years ago, this suggests we are on an upswing. Although anything could happen lets be optimistic about it.