Markets have gained almost 15-17% since the beginning of the year

Benchmark indices have jumped more than 15-17 since the beginning of the year. Those entering the markets now may have to pay higher valuations and the upside potential remains limited. Therefore, the risk to reward ratio at the current levels is not very favourable.

Valuations are not cheap

The Sensex companies are trading at 14-15 times forward earnings and are at historical valuations. Hence, valuations are not cheap.

Stocks have run up, but fundamentals have gone worse

Stocks have run up, while India's economic fundamentals have gotten worse. The GDP for the first quarter of 2012-2013 has come in at just 5.6. Inflation continues to remain high, which means that interest rates are unlikely to go down anytime soon. The government has hardly taken any major decisions with regards to propelling investment and growth and the recent reforms decisions are at best more long term in nature.

European situation remains grim

The European situation continue to be grim with austerity measures in bankrupt Greece leading to riots and Spanish bond yields hitting new highs. It's unlikely that Greece would be able to reduce its deficit, one of the criteria for additional bailout funds. There are talks that Greece could exit the Euro, precipitating a crisis in the peripheral regions.

Political uncertainly and rating downgrade not completely out of the way

The political uncertainty at the centre remains, with the withdrawal of TMC support to the centre. Present partners supporting the UPA government from outside are not very reliable. Also, fears of a downgrade continue despite all the noise made over reforms as the fiscal deficit of the government is unlikely to come down anytime soon.

Clearly, it's time to be cautious on equities, as the risks to the markets remain. The sharp rally in stock prices have been on the back of strong liquidity from foreign funds. There can be no guarantee that these funds would stay in India for a long time to come.

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