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Surging Market: Reacting to what?

August 16, 2009 1 comment

March ’09, price-earnings (P/E) ratio for BSE SENSEX based scrips (30) was 12.68, and by July end it was 19.1. The higher the P/E ratio, the higher price per share than annual earnings per share. The statistics mentioned above clearly show that how the stock prices have shot up too fast. Considering failing monsoon and drought in India and current situation of global economy, Indian stock market looks overvalued.

I agree that top 6 out of 10 economies of the world have shown positive growth after 5 quarter consecutive negative growth. From January 1st, The DOW is up 6% and NASDAQ has returned 26%. In Europe, Spain’s and Sweden’s indices are up 18% and 30% respectively since January. The Hang Seng in Hong Kong has gained 45% plus in the same time. Brazil’s Bopseva is also up 50% since January. It is being said that pumping money into emerging markets would help world to come out of the financial crisis. Because of which many believe that Brazil, China and India share market are booming.

Now it”s time to analyze India’s market, from January it appreciated mind boggling 60%. If we look at the statistics from March to August ’09, BSE touched 8000 in March, and it almost gained 100% by coming close to 16000 in August. This figure is far ahead of Brazil or China. Everybody knows that demand is drooping in India. India’s imports have been contracting. The ability of India to absorb goods and services from all over the world is coming down. It is hard to predict when demand will bounce back. In light of India facing rapidly increasing commodity prices, pandemic eruption, slow sales growth, biggest drought of the century and sluggish job market, I don’t find any motive for market to surge. Disinvestment could be counted behind this race, but this is a long process. If I remember correct, after budget only 1 PSU IPO has been floated. Rest is lined up and still market is booming.

Is this again a bubble or a collection of many bubbles? Famous analyst Abheek Barman may not be wrong in saying that if earnings don’t grow as fast as share prices, the price to earnings (PE) multiple will bloat, setting us up for another crash.

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