Wednesday, May 16, 2012

Sectoral PE multiples touch their peaks

For years, Indian stock markets have always had a darling sector in which investors wanted to invest their money. This was evident during both the bull rally leading up to the financial crisis of 2008 or during the gloom days of 2009. However, this is the first time in many years that the market is divided over which sector will outperform. This is evident from the divergence in the price earning (P/E) multiples of various sector indices. Investors have long considered P/E a useful metric for evaluating the relative attractiveness of a company's stock price. P/E ratios of power, capital goods and banking sector are almost at lows of 2009. This indicates that valuations of these sectors have reached the level of the crisis time and cannot go much worse from here.

However P/E ratios of some sectors like healthcare have reached three year high. A correction is also possible in metals where the sector P/E is much higher than when demand for metals had declined. A similar situation applies to IT sector as well. This is because the Indian IT sector is facing tough challenges due to the global uncertainty. Thus, with such divergent P/E ratios, it will be difficult for investors for pick an outperforming sector to invest in.

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