Continuing with its recent upward march, the Nifty today reached the historic 9,000 mark for the first time in history.
The share rally assumes significance as it comes even as businesses have reported witnessing some early pick-up in activity, the government taking several steps to kickstart the economic cycle even as the increased momentum is yet to show up in corporate earnings.
Fairly, then, there have been some concerns over whether the market has been out of whack with valuations, thanks to the pace of the recent upmove (the Nifty has risen about 65 percent absolute in a little over 18 months).
“There are a lot of naysayers who believe that the market has topped out or is headed for a correction,” says value investor Ramesh Damani. “I don’t think believe that. I think the index is going much higher from current levels.”
Damani’s conviction stems from the belief that corporate earnings will start looking better in a few quarters. “From quarter one (FY16) on, we should see a sharper recovery.”
Citing market historian Joe Granville’s theory of the three phases of the bull market, Damani says the stocks are in the second phase currently, which is typically the most durable and can run into months or years.
Damani concedes that several stocks – “the high-quality names,” he says – are indeed looking expensive on price-to-earnings basis. “I hope the earnings come through for them.”
But in the midst of a bull market, one cannot fight the trend, he adds. “If you sold your Eicher Motors at 30 PE, it’s gone up to 65 PE. Except occasionally, you don’t try to second-guess the PE the market is giving to a stock.”
Damani’s view was seconded by Adrian Mowat of JPMorgan.
“When we look to major emerging markets, India is coming through where it is easy to articulate the upside,” he says. “We think you will have relatively strong earnings in India with the decline in input prices, lower financing costs and strong operating leverages.”
More than earnings, Mowat says he is concerned if the corporate sector and consumers continue to stay “conservative” even in the face of the falling interest rates.
A second risk, he adds, could be in the form of government failure to push through key legislations in the wake of opposition from other parties.