By DK Aggarwal
Stock markets globally look cautious amid rising trade tensions, fears of slower GDP growth in China and a pricey dollar. There is a fear among market participants that escalating tariff battles could weigh on corporate profits.
However, the US stock markets are on the verge of recording their longest bull run in history. Robust corporate earnings and a tax code overhaul continue to fuel the markets upward trajectory along with a confluence of favourable economic policies and central bank polices.
Meanwhile, global central banks actions point to a synchronised withdrawal of stimulus measures that they have injected to revive their economies. The US Fed started increasing interest rates and the same has been followed by central banks across developed and emerging markets.
Despite these adverse events such as trade war, the Sensex touched the 38,400 level for the first time ever earlier this month while NSEs Nifty climbed to 11,600, a record high. The price-earnings ratio (PE ratio) of the Nifty50 index has also touched a level, where it faced resistance in the past.
Indias valuation premium over the developed market equities reached the highest level since 2011. It would not be wrong to say the Indias is currently one of the most expensive markets in the world.
Despite the Indian market performing well, stock valuations do cause worry, because the recent climb of the two frontline indices has made the market more expensive than those in competing emerging economies.
As Sensex and Nifty continue to hit fresh all-time high levels, they have raised concerns of over-valuation and a potential correction. Moreover, the rupee moving below the 70 mark has raised eyebrows, even as trade deficit widened to a more than a five-year high of $18.02 billion in July.
Now, the question that comes to mind is where to invest? Trying to time the market is notoriously difficult. So, investors should put their money only in quality stocks to limit downside risks. That means one should invest in stocks where there is clarity on earnings and growth as well as minimal impact of disruption and competitive pressures.
While valuations play a key role in determining returns, time horizon also plays an equally important part. The Indian consumption theme looks promising from a long-term perspective. Also, the pharma and information technology sectors are showing strength.
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ET Markets
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