Saturday, January 5, 2008

Indian Stock Market in 2008 - Investor's dilemma

The markets have started the new year with a bang! The question uppermost in everyone's mind is: Is this the right time to invest? Investors have reaped bumper gains in the range of 40-50% during the past two years, so the expectations are very high. Will the market be able to repeat the phenomenal returns this year too?
ANALYSIS:
The market generally discounts one year forward earnings. The expected EPS (Earnings per share) of sensex stocks for FY09 is around 1000, so if we discount this by a PE (Price to Earnings multiple) of 20, the sensex is valued at 20000, a level which has already been achieved. A discounting higher than 20 is frought with risk, because history has evidenced that whenever the discounting factor has gone beyond these levels, markets have tended to correct themselves. Temporarily higher levels may be sustainable due excess liquidity, but in the longer run the fundamental valuations hold good.
Going by this fundamental, the expected EPS of sensex stocks for FY10 is likely to be between 1100-1150, which the sensex will start discounting in 2nd half of FY09. So the sensex can reach a level of 22000 at the lower band and 23000 at the higher band by the end of 2008.
The sensex is at 20700 on 4th january 2008. So if you invest at these levels, the likely gains can be between 7% and 11% for the year 2008. Is it worth taking the risk for this kind of a ruturn?, whreas you can earn a near risk free return of 8% by investing in PPF/NSC/Govt. securities.
So, dear investors it is a time to think! Invest wisely. Anybody investing in stock markets must look for a ruturn in excess of 15%. Assuming that the sensex reaches the level of 22000 by the end of 2008, to earn a 15% return you should be looking to invest at the sensex level of 19000-19200. Watch out for these levels on the sensex, you will definitely get better opportunities to enter. Don't make a hasty decision, which you may repent later.
Having said this, there are still a few good opportunities available in the market. Scan the market for low PE stocks with high growth potential, which may still provide you with extraordinary returns. Invest if you have to in these low PE growth stocks to the extent of 25%, and keep ready cash to the extent of 75% to take advantage of the market dips.

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