High stock prices may call for vigilance


NEW DELHI: On Monday, even as Sensex and Nifty scaled new peaks, chief economic adviser Arvind Subramanian repeatedly warned investors about high valuations in the stock market and stressed the need for greater vigilance.
“We have seen around the world that when asset prices go up very much, they always tend to come back and so we have to be watchful. The higher the prices go, I think our vigilance should increase correspondingly,” Subramanian said during an interaction with media after the release of the Economic Survey.

The Survey said that against emerging macroeconomic concerns, policy vigilance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply, provoking a ‘sudden stall’ in capital flows.

A day after eco survey, Sensex tanks 200 points in early trade

The Survey said that the economic as well as corporate earnings growth needs to sustain the current stock market valuations, otherwise there could be a correction in the market. The higher valuation in the stock markets could be due to fall in the equity risk premium (ERP) reflected in a massive portfolio re-allocation by savers towards equity in the wake of policy-induced reductions in the return on other assets.


Currently, the price-toearnings (P/E) ratio of Sensex stocks is at 26.38, compared with 21.70 a year ago. At the peak of the last bull run in 2008 that had resulted in a 67 per cent correction in the value of the sensex in less than 18 months. The peak P/E was at 28.6. The long term average P/E for sensex is around 17.8. In comparison, current P/E for Brazil is 18.9, China is 16.5 and Russia is 7.2.
On Monday, led by HDFC, HDFC Bank, TCS and Maruti, the Sensex rallied smartly by nearly 1 per cent or 353 points to a new record peak at 36,444 but late profittaking pulled it down from the intra-day high level to close at 36,283, up 233 points. With the global markets showing signs of weakness late on Monday, market players feel there could be some correction in the Indian market as well on Tuesday.
“Currently market is expecting a good Budget with focus on fiscal prudence and reducing rural distress. Additionally, good Q3 results from index heavyweights have taken markets to new high. But due to premium valuation, investors were cautious on the mid and small cap stocks,” said Vinod Nair, head of research, Geojit Financial Services.
The current week’s trading is expected to be volatile since derivatives contracts for current month are set to expire on Thursday.


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