Nifty up 25% since Sept 13
Select global brokerage houses have, however, become cautious about Indian markets, with the Nifty having risen more than 25% since September 13 last year, when Modi was declared the BJP’s prime ministerial candidate. As Rajah pointed out: “There is also a risk that the government might not be able to live up to such high investor expectations, especially in the short term.” Leading foreign brokerage house Deutsche Bank has downgraded Indian stocks to neutral, citing expensive valuations relative to lower GDP growth. “We downgrade India’s rating to neutral from overweight/ neutral and advise non-emerging market investors to wait for better buying opportunities,” Deutsche Bank strategist John Paul Smith said in a note to clients. The new government needs to tackle several economic issues urgently and this could swiftly deflect investor attention. The most pressing one will be striking a balance between pro-growth measures and monetary tightening given that the underlying fiscal situation could be worse than it appears. There is also a strong possibility that the Reserve Bank of India may have to raise interest rates given the current inflationary situation and the possibility of a weak monsoon. Canada-based BCA Research said investors need to judge whether the rally has already discounted most of the good news and if share prices are at risk of a setback. The Sensex is trading at around 15 times forward earnings, which is expensive compared with other emerging markets such as Brazil’s Bovespa index at 9.5, Russia’s Micex at 5 and China’s Shanghai Composite at 8.3. “The recent market rally has taken valuations to a zone where they can no longer be termed cheap,” said Bharat Iyer, managing director and head of India research at JP Morgan. The rally over the past eight months has led to price-earnings ratio expansion as brokerages have cut earnings estimates over the past few quarters due to the slowdown. However, foreign institutional investors have pumped more than .` 46,000 crore into equity markets so far this year as global investors have built up high expectations on India.