India’s market, priciest since Lehman crisis, stokes concerns

MUMBAI: Conflicting signals from economic and corporate fundamentals are stoking concerns about the sustainability of a stocks rally that has made Indian markets the most expensive in a decade.

Falling earnings estimates, a weakening rupee, rising oil prices, a widening current account deficit and global trade tensions are some of the reasons why investors are worried that the markets may have run ahead of fundamentals.

The 50-stock Nifty index now trades at a 12-month forward earnings per share (EPS) of 18.65 times compared with 11.74 times on September 15, 2008, a day after Lehman Brothers filed for the world’s largest corporate bankruptcy, triggering a global stocks rout, according to Bloomberg data. For fiscal 2019, the earnings estimate for Nifty firms has been cut by 5.2% since April, while for fiscal 2020, it is down 5.5%. Contrast this with Nifty’s current price to earnings (PE) ratio, which is 12.9% and 24.7% higher than the three-year average and 10-year average, respectively.

The Nifty is up around 11% so far this year, riding on a massive rush of liquidity from local investors. Domestic mutual funds and insurers have pumped in ₹69,653.3 crore into Indian stocks since the beginning of 2018, while foreign investors have sold shares worth $342.57 million during the period.

Though the markets have touched record highs multiple times this year, only a few stocks are driving the rally. Only seven of the 50 Nifty stocks have gained more than 30% year to date. The BSE Midcap index has lost nearly 14.7% in 2018 so far.