The historic bull run of 2004-2007 ended in Jan 2008. First, we were witness to the catastrophic crash in the Sensex from 21,000 levels to below 9000. If this was not devastating enough, the market yo-yoed in a narrow range for six 'looonnng' years (after a reasonable recovery to 16,000-18,000 levels)... a fairly long bear phase indeed.
As such, this recent rally has come as a huge relief. It is good to see many greens in one's portfolio after being submerged in reds all around for all these years. Unfortunately, however, this is true for "some" investors only. Why I say 'some investors' is because "many" got anxious and nervous by the extended down-turn and quit the markets. They didn't have the patience or the capacity to stay invested despite all the gloom and doom around.
And, as is often the case, I am now being bombarded with one question — Should I sell as the Sensex / Nifty is at an all-time "high".
Frankly speaking, I have never understood why an 'all-time high' level is considered as an ultimate top or a cap; beyond which the market has only one way to go and that is...Down. Maybe it has got something to do with the human psychology.
Moreover, it is COMPLETELY WRONG to look at the markets in this manner. Perceiving the Sensex or Nifty number in isolation is totally meaningless, illogical and absurd.
Since investing in shares means becoming a co-owner in the underlying businesses, it is important to look at the Sensex / Nifty "in relation to" the profitability of the underlying businesses. After all, it is this profitability that will determine whether our investment in shares will be productive or will we end up losing money.
In other words, we should ideally focus on the market Price / Earning ratio if we have to get the true sense of the market. Only then would we arrive at the "right" decision as to whether the market conditions are "right" to buy, sell or hold. In fact, I would be happy if BSE and NSE stop quoting the Sensex and Nifty numbers... and instead display PE quotes.
Yes, the markets have regained the earlier highs. But in Jan 2008, the PE levels were around 28+. Whereas now they are around 18+. So, valuation-wise market is not expensive as it would otherwise seem from Sensex or Nifty number. Having said that, it must also be mentioned that at 18+ PE levels the market is neither cheap. Rather, going by the historic average PE levels in India, the market can be said to be fairly valued today.
Therefore, if India is able to sort out its economic mess and move forward, equity markets today offer an excellent opportunity. Will it happen? The answer lies in the elections. If we get a government with good economic sense, yes this could well be the beginning of another bull run. If not, I guess the downside is limited as it is unlikely that India's GDP growth will fall below the current levels of 4.5-5%.
