Stock Market Investment Strategy for 2010

We have seen spectacular growth for stock market investments in the year 2009. Many stock market investors who started investing in the stocks around the begining of 2009 would have doubled or tripled their investment during the last year. This is mainly due the cheap valuations of stocks towards the end of 2008 due global economic crisis and the way Indian marched forward by pumping liquidity into the system and strong domestec demand that more or less shielded the indian economy from the crisis to an extent. 2009 was an exceptional year and the same the returns can not be expected in 2010 and going forward.

Coming to year 2010, we started seeing the consolidation of stock markets. It is time for investors to be very careful and they have reset their expectations and look at the big picture. Stocks are not cheap any more. The Sensex is currently trading at a P/E around 22.2 and P/B around 3.7. Historically sensex has traded in the range of 15 to 16 P/E. That means the stocks are currently commanding high valuations with respect to their earnings. We are in overvalued zone. Expecting higher returns from an already overvalued markets is not wise. These valuations can only be justified if the earnings of the Indian corporates grow substantially and the free liquidity continues to be available in the system.

If we observe carefully, there has been no growth in the earnings of the sensex companies. So going forward it is very important that our corporates register good growth. If Indian companies register good growth, the sensex P/E could come down and stock markets can sustain current valuations or move forward. If the growth is lacking, then the rise in stock market has to be considered as mere speculation and excess liquidity. This will carry more risk.

So if we see EPS of indian companies going up in the next few quarters, w could see a rerating of Indian markets and the sensex and go up. If EPS remains constant, market should correct from the current levels as they are already overprices but due to excess liquidity in the system the markets could rise again after correction. But this situation presents substantial risk because of high hopes.

So the overall situation of the current stock markets does not suit serious long-term passive investors. Such investors have to wait for correction and should invest in specfic stocks are that fundamentally sound, has good growth potential and are available at reasonable valuations (typically with PE <>

Meanwhile the current situation of high liquidity can be used by active short term traders to make good short term returns. Follow strict stop-loss policy for all your short term trades.