Mumbai: Indian share prices rose to their highest levels in a year, propelled by a rush of global liquidity. But analysts asked whether prices have run ahead of economic fundamentals such as earnings, prospects of higher interest rates and the erratic monsoon.
The Bombay Stock Exchange’s Sensex, India’s bellwether equity index, closed at 15,670.31 points on Friday, its highest in 2009.
The BSE closed at 15,670.31 points on Friday, its highest in 2009. Ahmed Raza Khan/Mint
This is also the highest value for the Sensex in 13 months, since it closed at 15,696.90 points on 17 June 2008.
While the benchmark index rose 1.83%, or 282.35 points, the broader 50-stock Nifty index of the National Stock Exchange climbed 1.42%, or 65 points, to close at 4,636.45.
“It’s clearly a liquidity-driven rally,” said Anoop Bhaskar, head of equity at UTI Asset Management Co. Ltd, which manages Rs68,000 crore worth of assets. “World over, people are becoming less risk-averse and are taking a bet that India and China will grow faster than the rest of the world.”
According to a Friday note of international fund tracker EPFR Global, funds investing in Bric (Brazil, Russia, India and China) markets “continue to be money magnets”.
The Reserve Bank of India, in its latest quarterly review of monetary policy, has raised its growth forecast to “6%, with an upward bias” and foreign institutional investors (FIIs) seem to be buying into this. So far this year, they have purchased at least $7 billion (Rs33,740 crore) worth of Indian equities, net of selling. In 2008, they had withdrawn $13 billion from the country.
Since the start of the current rally in early March, which till recently many analysts were describing as a “bear market rally”, the Sensex has gained the most among major emerging markets.
India’s most widely tracked index has climbed 92% since the beginning of the calendar year. Singapore and Hong Kong are the closest rivals, with gains of around 81% each.
The Sensex is now trading at a multiple of 18.5 times estimated earnings for fiscal 2010. The price-earnings (P-E) multiple is arrived at by dividing the current market price by estimated earnings. A higher P-E multiple indicates that stocks could be expensive.
Analysts aren’t sure whether the current prices truly reflect future earnings.
“They (stock prices) are probably running ahead of fundamentals,” said Ullal Ravindra Bhat, managing director of Dalton Strategic Partnership Llp., an FII.
Bhat said that if liquidity continues to flow like this, valuations would be ignored for some time, but he raised concerns on issues such as corporate earnings, the monsoon and interest rates.
On the face of it, companies have reported excellent earnings for the three months ended June. Of the 30 Sensex stocks, 27 companies have beaten Street estimates.
A Mint study of 1,890 companies shows their collective first quarter profits are up 23% over a year ago, the fastest in the last four quarters. But analysts point out that sales have not grown so well, and a major contributing factor to profit growth has been cost cutting.
The collective sales of these 1,890 companies slipped 6% for the quarter.
“There has been an improvement in margins as companies have cut cost and extracted efficiencies,” said Bhat. “They can’t do this every quarter.”
Some analysts also said the effects of the government’s fiscal stimulus are wearing off. The government had announced stimulus packages in phases last fiscal year, amounting to 3% of the country’s economic output.
The Indian central bank, too, infused Rs5.62 trillion liquidity since September 2008 through a series of measures and cut its policy rate sharply from 9% to 3.25%.
But the central bank hinted earlier this week that interest rates are set to rise, a development that will likely depress demand and be a drag on growth. The government plans to borrow Rs4.51 trillion this year against an earlier estimate of Rs3.62 trillion as it needs to bridge an estimated 6.8% fiscal deficit.
The massive borrowing programme will likely crowd out private investments and banks will use bulk of their resources to buy government bonds, and under supply pressure interest rates will rise. Already, the benchmark 10-year bond yield is hovering around 7%, sharply higher than 4.86% in early January.
A recent Reuters poll of at least 100 fund managers, strategists and economists in the Asia-Pacific region, showed that China, South Korea and India were likely to be the first Asian countries to raise interest rates, but that would not be until next year.
Vinod Kumar Sharma, head of research at Anagram Stock Broking Ltd, said the macro “data is poorer than what it seems”.
According to Sharma, the threat of poor monsoon is not being taken seriously. Rains in June and July are 19% below the seasonal average and the worst in six years. It has led to a delay in sowing in several areas and many parts of India are facing the prospects of drought.
Economists said that low rains would affect factors ranging from hydropower production in the country to rural demand, which could dampen the pace of economic growth.
While the worst could be behind the markets, these factors would determine the trading levels in the coming months if the liquidity surge stops.
Ashwin Ramarathinam and Anup Roy contributed to this story.