There is temporary over-exuberance in the markets.

The Market cap to GDP ratio has reached around 1.5. The Nifty PE multiple is about 22 while Nifty Next 50 PE is around 25 and Nifty 200 PE is near to 25 once again. The overvaluation in stocks outside of Nifty is more glaring. You will find mature businesses, which at best can grow 20% CAGR trading at a PE of about 100-150 and quoting at P/B of around 18-25. ROE in many of these cases are moderate near the 15% mark. The Nifty Monthly RSI has crossed crucial levels of 85. We can expect a major price correction as well as some time correction.

Nifty PE multiple is at 22 because banking and finance stocks are trading at a PE of about 15-18 and they constitute around 38% of the index weightage. Hence, the other part of Nifty might have reached a PE of about 27-28. If the Banking stocks cannot pull up the Nifty, there is little hope that other sectors have the capability to do the heavy pulling.

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