Indian stocks still attractive despite their high valuations
One of the strongest among EMs: Fund managers
MUMBAI: Global fund managers are still upbeat on India despite stock valuations appearing expensive relative to their emerging market peers. While valuations may appear rich, Indian stocks are still nowhere near the frothy levels seen before the global financial crisis led to a stock market crash in 2008.
“Indian equities always look a bit expensive compared to other countries and after the recent run, valuation is on the high side,” Hertta Alava, director of emerging market funds at Finnish firm FIM Asset Management Ltd, said in an email from Helsinki. “I’m not too worried. India is my long-term favourite among big emerging economies,” said Alava, who manages €350 million in emerging market (EM) assets.
The premium at which Indian stocks trade relative to their emerging markets peers is still much lower than the more than 100% seen in early 2008.
The MSCI India index trades at 20.74 times the one-year forward price to earnings (P/E). That is at a 61.34% premium to the MSCI Emerging Markets index, which trades at 12.85 times one-year forward P/E. Earlier this month, this premium stood at 62.99%, the highest since February last year, when it was at 69.54%.
The NSE Nifty rallied to a record closing high of 9,160.05 points last week, after the Bharatiya Janata Party (BJP) pulled off a resounding victory in the Uttar Pradesh assembly elections.
Investors are betting on stronger and bolder reforms ahead on expectations that this win in the crucial state would set the stage for continued political stability at the centre.
Even when one looks at the market-capitalisation-to-GDP ratio, Indian shares do not seem to be in the bubble zone. The ratio stands at 78.9%, albeit higher than in recent times, but still much lower than the more than 100% levels in 2010 and early 2008.
Still, a significant earnings recovery is not expected before the last quarter of the current calendar year, as the implementation of the Goods and Services Tax, scheduled for July 1, may hurt earnings in the near term.
The silver lining, however, is that the impact of demonetisation on corporate earnings may have been overestimated as the December-quarter earnings data shows. Among the 50 members of the Nifty index, 28 beat earnings estimates for the December quarter and 22 missed them.
In a February 28 report, Credit Suisse said investors are focused on emerging markets this year, particularly India and some other Asia-Pacific nations. This year’s top three regional strategies were Asia Pacific, emerging markets and India, clocking in at 24%, 22% and 19% net demand, respectively, the report said.
“The point as regards the Indian stock market is the continuing evidence of domestic equity mutual fund flows. Foreigners began 2017 looking for reasons to sell India, not buy it. But capitulation has now begun, and the UP election result will have further accelerated that capitulation,” Christopher Wood, MD of CLSA,said in his newsletter “Greed & Fear” on March 16.
Foreign institutional investors have pumped in $3.8 billion in Indian shares, the second-highest among its peers in emerging markets and Asia after South Korea.
The rupee has gained 5.17% against the dollar from a record low of 68.86 on November 24.