What they don't tell you in corporate media.

Monday 3 November 2014

Governments stimulate stock market.

An article in Economictimes said today that the recent jump in stock market after Japanese central bank announced a big dose of stimulus, the next jump is expected from European Central Bank. This is quite true and is quite possible.

But what is a stimulus? It is central bank buying bonds, including Govt bonds by printing new currency. This is creating new money. Does this increase sustainable profit growth of someone who manufactures a car or someone farming rice? No! So what does it do? The receivers of the money come to stock market(in this instance) and bid the prices up so the P/E ratio rises.

So how much can the P/E ratio go up without the growth in company earnings to match it? I don't know. People will still buy stocks even at P/E of 50 or even 100 expecting to sell it after sometime to another person who believes in the same logic. Eventually though the whole thing will correct itself. It always does. Govts and Central Planners can't keep printing unlimited currencies to "stimulate" the stock market. If they do, it might cause confidence in currency to collapse and that will be a bigger event than what they try to fix.

The next problem with "stimulus" is that it is not free. It is debt, either at private or at govt side. How adding more debt to an already big debt problem will solve it, is a big mystery too.

And here some contradicting information from Economictimes again.

Here "experts" are saying sensex will reach 54000 and another saying 20-30% gain in next 3-4 years.

Here shows company sales growth slowing down.

3-4 years is a long time. We could very well reach there if the "stimuluses" continue.

Here is the current P/E of the whole sensex.



At 19, it is already quite high and individual companies in sensex could have P/E even higher. But we have seen P/E in sensex peak at 22 before. Can it reach there? Hard to say. But I would like to wait for a decent correction of say 20% before buying anything at these high valuations.

No comments:

Post a Comment