Consistent foreign inflows and a stable macro environment have helped Indian equities command the highest forward valuations among emerging markets, even as the domestic market remains in a correction mode. Sensex’s forward price to earnings (P/E) ratio currently stands at a little more than 15 times – the highest among emerging markets despite a 5% fall in the last three weeks.
Andrew Holland, CEO, Ambit Capital, said higher valuations do not imply India has become an expensive and therefore an unattractive investment destination. “The valuations of India are higher in respect to three sectors – pharmaceuticals, IT and FMCG . If we strip these sectors out, broader markets will have a P/E of around 12-13 times which is very attractive given the stability in the economy,” Holland said.
The Indian market valuations inched higher in the later part of 2013 on hopes of a new government at the Centre which would push for economic reforms. The euphoria increased further in 2014 when the BJP-led National Democratic Alliance (NDA) government assumed office following a decisive and clear mandate.
The NDA’s victory corresponds with meteoric rise of benchmark indices which rallied nearly 40% between January 2013 and December 2014. During these years India also witnessed impressive inflows from foreign portfolio investors (FPIs). In calendar year 2013 and 2014, FPIs bought $16.16 billion and $19.7 billion worth of Indian equities, respectively, Bloomberg data showed.
The Sensex touched its lifetime high of 30,000.74 points in early March this year. Since then, the Sensex has corrected more than 5000 points amid global concerns and delay in reforms by the government. In the last fortnight alone, benchmark indices lost nearly 4% as the investor sentiment was dampened by Bihar Assembly election results.
Similarly, South Korea’s valuations were drastically lowered in the aftermath of sharp declines in July and August. Even then, the country was one the least favoured destinations given the issues pertaining to corporate governance and heavy dependence on exports from China.
While Indian markets have further room for correction and valuations may cool off in near-term, several domestic and foreign financial services firms continue to have faith in India’s long-term growth story. Brokerages continue to point out that prospects of India continue to look bright. One such indication is the recent inflows by foreign funds. Despite volatility in the global markets, FPIs remain net buyers to the tune of $4.5 billion compared with various emerging markets that have seen net outflows.
“We believe the market’s trajectory is linked to the economy. We see steady gains building up, the macro staying supportive, the politics only moderately ruffled, and any significant market dips, a buying opportunity,” said Aditya Narain, MD and India strategist, Citi Global Markets.
US-based investment banking firm Morgan Stanley said India, along with Singapore, will be favoured destinations for foreign funds in near future.
“Major factors that drive our overweight status to India are low political risk score, strong GDP growth prospects and relatively better corporate profitability among EMs in Asia-Pacific excluding Japan,” the brokerage said in a note to investors.
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