Sensex Close Above 21000 Mark– What Next?

Equity markets have always remained a very vibrant space and kept the investors on their toes. At this point of time the enthusiasm is higher in the markets and we have seen a consistent up-move remaining over the psychological 21000 mark. It is time to celebrate as Sensex is trading at higher levels, and the way indices are surging it seems the investors are really celebrating.

However while there is one set of investors which is celebrating there is another set of investors who are taking a cautious approach. There is every reason to be cautious, which can be substantiated by the fact that twice before this when the Sensex has crossed the 21000 mark there was a kind of sharp southward movement. This time the risk is again higher as the macroeconomic factors are also not on the favourable side and excess liquidity form the developed markets driving the indices northwards.

So the moot question is, what to expect ahead in near term? We feel every rise in the indices should be taken as an opportunity to book profits. It does not mean we are expecting a sharp correction. However considering the uncertain political scenario that is currently prevailing in the markets we are expecting the markets to remain volatile. Apart from this, the government has also failed to provide any long term solutions to core issues like fiscal deficit, inflation and slowing GDP growth.

Even on the earnings growth has been lagging with more downgrades happening in the first quarter of FY14 and even second quarter is also not providing any hopes on EPS upgrades. Though the third quarter is likely to bring some hope, increase in interest rates (50 basis points in past three months) is expected to eat some part of bottomline.

We feel the valuations are reasonable at current levels and hence with no major changes on economic front and on the reform front, it is unlikely to take the markets upwards significantly. This clearly indicates that the risk to reward ratio is not in favour at this point of time. Hence, the prudent strategy that should be taken up is to book profit and sit on the sidelines till the dust settles down.