A recent Credit Suisse report asks the question on everybody's mind... where now? And comes out with mixed answers...

A latest CS report points out that Indian markets are now just 5% away from their previous peak but in terms of the peak P/E (price to earnings ratio), we are still way below. In the previous peak, the markets touched a P/E multiple of 23x while we are still at only 17x. 

While it is probably widely known that this rise has been driven by foreign institutional investor money — FII flows of around $11 billion took the market up from 17,000 to 20,000 — the report points out a lesser known fact — ETFs have accounted for only 12% of this compared to about 20% in 2009 — investors were worried that this would be much higher, leading to ‘hot money’ flowing out of the country too quickly in case of any unforeseen event.

However, there is something that should have investors worried too. The report points out, “The last 1,000-point move took just seven trading days compared to 30 and 37 days for the previous two.” We have moved up too fast.

For the market to achieve new peaks, generally, a more holistic participation is necessary. However, this time, domestic investors have stayed well away. Mutual funds have been net sellers worth $2.5 billion mainly because of redemptions — which means that even retail investors are not convinced. Insurance companies have been sellers worth almost $2 billion. The lopsided participation by FIIs makes the Indian market intensely vulnerable to global shocks even if it seems that most of the bad news is factored in. Media reports indicate that investors seem very confident of continued FII participation. 

The CS report concludes that, “So far, financials, real estate and staples have been the leaders of the rally while utilities, energy and pharma have been the laggards. We believe that now telecom, industrials and real estate provide the best combination of improving fundamentals and valuations. Among stocks, our top picks are Bharti, Tata Motors, L&T, ICICI Bank and Reliance Industries.”

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).