In the event the Sensex touched the pinnacle of 21,005 on November 5, 2010, it was eventually trading for a price-to-earning, or P/E, ratio well over 24. From that level, it fell over 29% till October 7, 2011, to 16,233. On October 7, 2011, the P/E ratio of a typical Sensex was 17.8.
In accordance with historical data, a P/E ratio of under 18 is a wonderful chance to build wealth. Between 2001 and 2008, the P/E ratio of the Sensex fell below 18 seven times. On two times, the Sensex gave a return well over 150% within the next 36 months. Market experts say the recent fall has made the markets attractive.
This is an excellent marketplace for long-term investors. Following the correction during the last few months, the Sensex is trading well below its average value as well as earning yield is close to the bond yield. A long-term investor should use this chance to purchase quality large-cap shares. With the stock market falling over 11% in three months till September 2011, the valuation has dropped to the fair to undervalued zone. We believe investors should increase allocation to equity at current levels with an investment horizon of one to two years. We are neutral to bearish in the short term due to global concerns such as the European sovereign debt crisis and slow US recovery. We are bullish in the medium term.
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