May 26, 2022

Sensex At 50K: Is A Huge Correction In The Offing?

By Ashwini Agarwal
First publised on 2021-01-22 07:40:45

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The stock markets are on fire. The Sensex has climbed mount 50K. With massive foreign funds flow and excess liquidity in the domestic financial market, financial assets have become excessively overpriced. There is bound to be a correction as even the RBI governor has recently warned that financial assets, especially some stocks, are trading at unrealistic prices. He warned the public to make considered decision in buying such assets at this time.

Will this rally or bull phase sustain? Or will the bubble burst soon? Is it a good thing to have buoyant markets with a bull phase?

There are no easy answers to these questions. If one goes solely by fundamentals, there is a strong case for a correction happening. The P/E ratio is loaded against investors who have to invest Rs 34.42 to earn Re 1 from stocks. Companies are overvalued as the book value to price ratio is 3.39. These are pointers that operators have taken long positions and the market is bound to see a correction. This is also true because the RBI has indicated that it will systematically reduce the liquidity in the financial system.

But at the same time, buoyancy in the market is helping IPOs as retail investors are lining up to buy new offerings. All IPOs recently have been oversubscribed heavily and their opening prices have further fuelled investor interest. The despondency of 10 months ago seems to have vanished and money is there for good projects backed by strong entrepreneurs.

But in these exuberating times, those retail investors who do not informed decisions are likely to burn their fingers. When markets are rising, everyone is overpowered by greed. A lot of misinformation is also spread and rumours abound. Hence, small investors would be advised to book profits wherever possible and wait for a correction before taking new positions.