Mumbai: India’s best-known equity index, the Bombay Stock Exchange’s Sensex, has slid more than 28% this year and is the fourth biggest loser in Asia in this period.
But it remains the second most expensive index in Asia in terms of price-earnings (P-E) multiple, signalling that investors may move their money out of the market as they hunt for cheaper options amid economic indicators that point to slower growth.
Analysts and fund managers are bracing for a further slide in the Sensex, as portfolio funds are expected to shift capital from Indian markets to relatively cheaper emerging markets and asset classes other than equities.
Inflation in India touched a 13-year high in the week ended 7 June, the latest week for which the data is available, stoking concern that the central bank would raise the key interest rate and tighten money supply — making it more expensive for firms to do business.
P-E refers to the ratio of a company’s share price and its per-share earnings. A high P-E multiple suggests investors are expecting higher earnings growth and have bid up the stocks to reflect that.
According to Bloomberg data, the P-E multiple of the Sensex fell to 17.69 on 20 June (in terms of 2007-08 earnings), from 27.67 on 31 December 2007 (based on January-December 2007 earnings), suggesting that investors are bearish on growth.
At current valuations “India is still an expensive market, compared to other emerging markets,” said Nicholas Toovey, regional head of equity at ING Investment Management Asia Pacific (Hong Kong) Ltd.
In terms of P-E multiples, Japan, South Korea, Hong Kong and Singapore are key Asian markets that are cheaper than India at this point. Brazil and Russia, two other strong emerging markets that have gained so far this year, are also cheaper than India.
The Sensex closed at 14,571.29 on Friday, its lowest level this year, losing 3.4% or 516 points after the inflation rate crossed 11%, higher than most estimates. Still, India’s P-E multiple is lower than that of China, whose benchmark index leads the region with a P-E of 22.
Investors say the spike in the price of oil continues to weigh on the market. India subsidizes fuel for everyday consumption, but as a result the government has to fund the difference in the purchase price of oil in the global market and the selling price of the refiners. Unable to continue the steep subsidies, the country did raise the price of fuel recently.
“Sentiment towards the Indian stock market remains extremely fragile so long as oil refuses to correct significantly,” Christopher Wood, chief equity strategist at CLSA Asia Pacific, said in a report.
Worse, Friday’s sell-off might continue unabated when the markets open for business this week, because the world’s largest equities market, the US, which often sets the cue for other markets, also declined on Friday. The rebound in crude oil prices and lower than expected earnings for several firms including FedEx Corp., the second largest US package-shipper, pushed confidence lower, resulting in the sell-off in the US.
Foreign institutional investors, the largest investor class in the Indian market, have, net of purchases, sold stocks worth $5.7 billion (Rs24,510 crore) since January after buying $17.36 billion of stocks last year. All signs indicate that this trend will continue.
A research report issued late last week by senior credit analysts at Royal Bank of Scotland advised clients to stay away from stock markets because it expected a severe crash across global equity markets.
The global markets have been roiling for several months by a bad-debt crisis that has forced nearly $400 billion in writedowns among financial institutions. The issue has been exacerbated by a steep rise in crude oil price that rose to a record of nearly $140 a barrel this month.
According to the head of the institutional desk at a foreign brokerage firm, who did not wish to be named, “many large FII funds from Europe and US are shorting Indian stocks.”
Shorting or short selling is a practice of selling borrowed stocks in the hope of buying them back at a lower price. In other words, short selling indicates a negative view on the valuation of stocks, or simply that prices will dip.
In a report, US investment bank Lehman Brothers said it expects a rate hikes of 25-50 basis points in India and a clutch of other Asian countries, to contain inflation. One basis point is one hundredth of a percentage point.
And, “inflation means rates must rise and so will volatility,” said Garry Evans, Asia-Pacific equity strategist at HSBC.
The Indian central bank will review its monetary policy on 29 July, but most analysts expect it to hike its policy rate even before this meeting and that will further queer the pitch for the stock market.