Sensex expensive at current levels; may drift towards 18,500

NEW DELHI: The Sensex is trading at a PE multiple of about 14 times, and most analysts feel, given the current economic environment, its valuations looks expensive.

"Yes, valuations look expensive and the markets are not cheap and are trading close to long-term averages," said Jyotivardhan Jaipuria, HoR, BofA-ML in an interview with ET Now.

"But there is a belief that we are close to bottom on the earnings and the economic cycle. The last time we saw something like this was in 1997 to 2002, after which we had a strong spell of sharp earnings growth, with the next five-year average of 25 per cent," he added.

If we go back into history, in a scenario when there are poor earning numbers and slowdown in economic growth, markets have tended to move in 10-11 P/E, which is not the case this time.

Going forward, most of the return in the market will be led by earnings growth. However, the good thing is that valuations are still holding up. According to analysts, what is preventing the markets from heading lower is the hope that we are close to a bottom on the earnings and the GDP side.

Moreover, a lot of people are building hopes of an interest rate cut going forward to kick-start growth in Asia's third-largest economy.

Jaipuria is of the view that the markets are likely to remain range-bound, between 18,500 and 20,500, with weak economic and earnings growth capping the upside and hopes of rate cuts and policy measures protecting the downside.

On P/B, the market is at 2.3x, a 16 per cent discount to historical average of 2.8x. However, lower P/B is justified by lower-than-average RoE.

Moreover, the global investment bank still expects minor downgrades to Street earnings estimates for FY14. This means that the Sensex PB may be higher than expected.