Two years ago, almost to the day, the Sensex first crossed the 17,000 mark, having climbed from 16,000 in just five heady trading days. That was in the bubbly days that prevailed in 2007, when the eventual scale of the financial crisis was in the realm of the impossible. The stock market index went on to scale 21,000 before hitting 17,000 again in May 2008, but this time on the way down to a low point of 8,200 that was touched as recently as March this year. Now, in another twist in what has been a roller-coaster ride, the index is back at 17,000, having more than doubled in value in less than seven months. For that very reason there is the need for some caution, and to not get carried away. Trading patterns in the futures market suggest that short positions have been built up, pointing to a correction of some sort.
At the same time, it is obvious that the change in the market reflects the underlying change in economic trends. The business mood has witnessed a dramatic upswing, compared to six months ago, as both sales and new investments have gathered momentum. The macro-economic indicators reflect the change, with the industrial production numbers underlining the fact of a recovery, while the decline in exports is at a decelerating pace. Credit growth is still modest, but recent numbers suggest a shift in gears for this engine too. The news in the rest of the world is quite good too, with the G-20 deciding to not pull back from stimulus spending just yet, and a variety of indices pointing to changed trends in some of the major economies. International investible money has naturally been coming into India once again, and the July-September quarterly numbers will in all probability justify the optimism that is reflected in the market.
However, it would be hard to contest the argument that the market is now fully priced, if not over-priced. On anticipated earnings for the current financial year, the price-earnings multiple is now well above the average level of 15, suggesting that the market may already have over-shot on the rebound. The speed with which companies are raising funds in the primary market also suggest that company promoters do not think the new levels will last, and want to cash in while the going is good. The danger is the usual one, that retail investors, who have been caught out by the speed of the recovery, try belatedly to cash in on a buoyant market, and find to their cost later that once again they entered the arena too late in the day.
