Wednesday, January 24, 2018

Why a rising Stock Market isn't Risky (as long as earnings continue to grow)

The New Year has started off in a sensational note for Indian stock market bulls. Both Sensex and Nifty indices have surged upwards - touching new highs on a regular basis.

Most market experts had predicted more moderate stock portfolio returns in 2018 after huge gains made in 2017 on the back of strong liquidity flows into domestic mutual funds.

Instead, bulls have jumped off the block, and been on a buying spree as if there will be no tomorrow. What has caused the sharp parabolic rise in both stock market indices? 

In a post last week, a probable technical reason why FIIs have turned bulls after 5 straight months of net selling in Indian equities was put forth.

There is a fundamental reason as well. After several quarters of muted earnings growth, India Inc. appear to have hit the fast forward button in Q3 (Dec '17) - albeit on a lower base due to the disastrous demonetisation exercise in Nov '16.

Have the bulls over-reacted to the improved Q3 corporate results announced so far? Is the market getting riskier by the day?

In a recent article in, Michael Kramer has argued that a rising stock market isn't risky as long as corporate earnings continue to grow.

Stock market players have a habit of looking ahead. Index P/E can look expensive based on last year's earnings, but may not look so expensive based on projected one year forward earnings.

Read the full article here. 

No comments: