China to liquidity withdrawal, here are key risk factors for the markets


China Market valuations have risen considerably over the past few quarters both in the frontline indices like Sensex or Nifty and in the midcap smallcap indices. The current equity market valuations are factoring in a robust recovery in earnings growth. Retail investors are worried whether the valuations would sustain at current levels. This depends on how soon and robust the earnings recovery is and how sustainable it will be.

While optically,the markets may seem to be expensive going by historical standards, bulls say that price-to-earnings (P/E) multiples are inversely correlated with the cost of capital.
Further, markets typically top out at times the economy is overheated and there is a general euphoria in the markets.

 Index composition/changes and index earnings composition are other parameters to check whether the markets are really overvalued or not.The truth lies somewhere in between. If the economy is close to a bottom and corporate earnings are slated to recover soon, then the P/E ratios will look reasonable going forward.

However, in the case of earnings recovery being delayed, the markets may be expensive and may remain sideways for an extended Read More

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