Why equity markets are not falling??

Equity markets are not falling at all. The move has been one way up since Mar 09. I remember one of my cousins calling me on 9th March asking whether he should buy Index futures and I told him not to do so. He lost a fortune because of this. In hindsight, he was bang on target as the market had started rising from 9th Mar 09.

I, in my fund manager wisdom, thought that 2500 might not be the bottom for Nifty. But I, because of my limited experience, ignored one very powerful thing. The power of various goverments and central banks and when both decide that asset prices should not fall and should go up, no body in the world can do anything. Money is available, is cheap and credit is not happening. So where is that money going? Buying assets and increasing their prices. Practically, the flow and availability of money could make every price possible for an asset and could make everything bad economic data look good (imagine historic unemployment in the US, increasing every month and stock market being equally strong).

Last bubble also started on the same line - cheap and easy money prompting consumers to leverage.

Will we see the same what we saw in 2008? I dont know and the chances are that we will not see another Lehman. Governments have learnt the cost of systemic risk.

So will the markets and asset prices continue to become expensive. Answer is yes till Federal Reserve tightens its belts.

Whent this could reverse? High inflation? Rising interest rate environment? or something else? I have really no idea. But whenever it happens, there is a high chance that it would be bad.

Equity valuations in India

On last 12 month numbers, Nifty valuation is as follows:
P/E = 21.59, E/P = 4.63%
P/B = 3.77
Div yield = 1.06%

10 yr G Sec yield = 7.38%

The earning gap between 10 yr and index is 2.75%. This means in a secured asset, 10 yr G Sec paper, the investor could get 2.75% more than equities. Clearly, the risk reward is not in favor of equities. So, equities could fall by 15 - 25% and investors may need to reduce allocation to equities.