The Indian stock market index, BSE Sensex, crossed the high of 30K this week. While the rally was mostly supported by positive global events that included strong corporate quarter and tax reforms in the US, abating French election worries and easing of geopolitical tensions, a host of domestic factors have also added momentum to the rally. India’s strong economic fundamentals, along with key reform expectations (mainly GST) from the popular ruling party to drive sustainable economic growth have been instrumental in keeping investor confidence high.
Will this rally sustain?
At a PE (CAPE) of ~20, Indian markets are definitely overvalued as compared to other EMs. This makes the markets more prone to a global correction. While the global markets so far have been boosted by decreasing risks from major events (French elections, Trump policies), significant headwinds (Eurozone elections, geopolitical tensions) still remain. Further, a strengthening dollar from Trump tax plans may have implications for the Indian markets. Also, domestically, the markets need solid corporate earnings to be able to justify high valuations. Having said that, the long-term story of India remains intact
Investors need to tread the markets with caution
While it may be tempting for investors to invest in the rally and not remain left behind, it would help those who have not invested in the past to wait for a correction to avoid the trap of investing at the peak. Existing investors should also wait for good buying opportunities (temporary dips) to add on to their existing holdings. Behold investors, cautious optimism is the way to go!
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