The rally is here to stay for sure

Lot of companies should be in a position to continue to turn in earnings growth of between 15 per cent and 18 per cent over two to three years.

The Sensex seems to be unstoppable. Brushing aside the 8000 mark, the barometer has moved on to 8138, while the S&P CNX Mid Cap too has scaled a new peak to touch 3807. If you haven't already given in your post-dated cheques for an systematic investment plan (SIP), don't lose heart. Sure, you're not the early bird but you're not too late either.

That's because the economy is still in fine fettle with estimates of 6.5- 6.8 per cent for GDP growth in FY06.That is one of the best growth rates anywhere in the world. The IIP growth for July has been 6.7 per cent, lower that that in June but that's partly owing to the floods in Mumbai.

More important, companies continue to do well as has been seen from numbers posted in the first quarter of FY06. If there were some disappointments the have been more owing to issues relating to value-added tax.

Even on a high base, sectors such as two-wheelers continue to grow in double digits. That and indicators such as the growth in retail loans show that consumption demand is not flagging. As for engineering companies, with the capex cycle turning, they should not lack orders.

In fact, with capacities coming on stream in 2006 and 2007 in sectors such as cement, volumes should increase, thereby, boosting growth. Indian firms today are able to compete in the global arena and have tremendous cost advantages that they can leverage. As such, short-term factors should not be overplayed, the idea now is to be able to see the big picture.

Valuations are becoming richer by the day. The Sensex now trades at 15 times FY06, while a good many stocks trade at price/earnings multiples (P/E) of between 25 and 30 or even 40 times. That is no doubt expensive from a near-term earnings growth perspective.

But the better lot of companies should be in a position to continue to turn in earnings growth of between 15 and 18 per cent over two to three years. The premium being paid for some companies is partly because some of these stocks have low floating stock and the demand for these stocks, especially from institutional investors, has been strong.

While diversified funds have given one-year returns of around 65 per cent versus 52 per cent for the Sensex, it is unlike that such returns will sustain. It would not be realistic to expect more than 15-18 per cent annually. If you get more, its a bonus. But even these returns are good compared to what you would earn from other fixed income products.

So, if you're wondering whether it's all over, don't. Sure, there could always be a correction -- the market could slip by 300 or 400 points.

But then, since you are investing through an SIP, you stand gain from lower prices, which will help average out the cost. That's a better way to invest rather than putting in a lumpsum. Try it out.