Markets on a roll, or is this a bubble?

While soaring markets bring loads of money (gains) and joy to investors, it also puts them in a quandary — on the investment strategy they need to adopt amidst such euphoria.

Indian markets have been hitting record levels. Key indices have gained 13-14 per cent year-to-date, pushing India up to the slot of the best-performing market globally.

While valuations look expensive, growth is yet to pick up. This could lead to doubts in the minds of investors on whether the markets are in bubble territory.

Market analysts though, assuage such concerns.

“Can’t say that it is a bubble as valuation (one-year forward) right now is 18-19 times and not 24-25 times as seen historically,” said Gautam Duggad, Head of Research-Institutional Equities at Motilal Oswal Financial Services.

Markets across the globe, barring Japan and Russia, have gained between 1 per cent (China) and 14 per cent (India) due to factors such as benign interest rates and revival of growth in major economies.

FIIs have pumped in around ₹42,000 crore and domestic MFs are witnessing strong flows. “It seems to us that the sole investment thesis in some cases is ‘liquidity’, which is quite bizarre since ‘active’ investors should be deciding on the fundamental value of stocks rather than leaving it to a nebulous issue such as ‘liquidity’,” pointed out Kotak Institutional Equities. Hence, the party is likely to continue as long as there is liquidity.

Even if it gets dried up, Indian equity markets will see lesser pain as the country’s macro economy is in robust shape. But that also implies that fundamentals need to improve sufficiently to support valuations. That doesn’t seem far away either.

Kotak expects earnings of Nifty companies to grow 16-17 per cent in the next two financial years led by banking, energy and metal sectors.

The Nifty 50 has gained 14 per cent till date but Nifty Midcap and Small Cap have jumped 26-28 per cent. Though there is hardly any value left in most of the sectors (large, mid or small), experts unanimously prefer large caps.

According to Vaibhav Kapoor of IL&FS, the risk-reward ratio is poor, especially in mid- and small-cap stocks. PSU banks and select consumer discretionary, automobile, and capital goods stocks in the large-cap space look better bets.