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Business News/ Market / Stock-market-news/  India’s market cap gain best barring Cyprus in 2014
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India’s market cap gain best barring Cyprus in 2014

But investors say Indian equity indices no longer among most preferred bets as valuations seem to be turning expensive

While the BSE Sensex has risen 24.3%, the broader market has outperformed, with FIIs pumping in a net of $12.5 billion in the asset class, clearly indicating that investors’ choices have not been concentrated towards the pack of frontline stocks. Photo: Hemant Mishra/MintPremium
While the BSE Sensex has risen 24.3%, the broader market has outperformed, with FIIs pumping in a net of $12.5 billion in the asset class, clearly indicating that investors’ choices have not been concentrated towards the pack of frontline stocks. Photo: Hemant Mishra/Mint

Mumbai: As key Indian equity indices rule at record high levels, emerging market investors say that the fundamentals of Indian markets are intact, although they are no longer among their most preferred bets as valuations seem to be turning expensive.

The country’s market capitalization has risen 34% since the beginning of the year, the most among all markets, with the exception of Cyprus, one of the smaller markets.

While the 30-share BSE’s Sensex has risen 24.3%, the broader market has outperformed, with foreign institutional investors (FIIs) pumping in a net of $12.5 billion in the asset class, clearly indicating that investors’ choices have not been concentrated towards the pack of frontline stocks.

India ranks 10th in the world in terms of market capitalization, which stands at $1.52 trillion, surpassing Australia and South Korea, but it is still at only around 40% of China’s.

“We do not see much room for the Indian market to outperform global emerging markets," said Maarten-Jan Bakkum, strategist, emerging markets equity, ING Investment Management International, the asset management arm of NN Group NV.

According to Bloomberg data, India’s benchmark Sensex trades at 16.91 times price-to-earnings (P/E), at a premium of around 40% to the MSCI Emerging Markets Index, which trades at 12.09 times. Key indices at peers Brazil, China and Russia trade at 12.43 times, 8.85 and 5.18 times, respectively. Among other key emerging markets, the benchmark indices of Mexico and the Philippines trade higher than India at 21.53 times and 20 times, respectively.

“Relative to other emerging markets, India looks a bit over-bought and expensive. The fundamental picture is good. Long-term prospects as well. But a correction is likely in the coming quarters," Bakkum said from the Hague, Netherlands.

Some were more optimistic. However, other markets seem to be replacing India on their favourite list.

“I’m still relatively positive about Indian markets, especially if I take a medium-term view (one-two years)," said Hertta Alava, director of emerging market funds at FIM Asset Management Ltd, which manages €350 million worth of emerging market assets.

“Near-term valuation multiples are starting to look a bit high in some companies, but of course there is a reason to believe that economy will improve during 2016-2017, which should help earnings growth," Alava said in an email from Helsinki.

But then, there is a question mark on how much the Indian market can rise in the near term. The spectacular gains seen so far this year may not necessarily be repeated in the rest of the year.

“Earlier this year, India was my favourite market among BRIC (Brazil, Russia, India and China) countries, because I shared market’s view about Mr (Narendra) Modi’s ability to lead India to better times. I still like India, because with better policies it should be possible to raise the trend growth to 7-8% medium term," FIM’s Alava said.

A lot of the gains in the Indian market for this year were attributed to expectations that the National Democratic Alliance would form the government at the centre, which came true. Narendra Modi, who has a track record of performance during his tenure as chief minister of Gujarat, took charge as Prime Minister of the world’s largest democracy in May.

While hopes have been running high that he would push through difficult reforms to prop up Asia’s third largest economy, deliveries are yet to happen, though it has been only three months since the new government assumed power.

For the next few months, there might be better upside in some other markets, where valuation levels are still much lower, according to Alava. Brazil could see a similar election rally if Marina Silva defeats Dilma Rousseff in the forthcoming general election in October.

“In China, the worst fears about a system collapse are fading and state-owned companies have started to perform well in anticipation of reforms. Re-rating potential is still quite high there," Alava added.

Others seem to agree with the view on India. Jitendra Sriram, director and head of research at HSBC Securities and Capital Markets (India) Pvt. Ltd, said his organization was “neutral" on India currently within the Asian context and sees a 3% return into the year end.

“Within Asia, we are more constructive on Indonesia, China and Thailand. India is in the middle of the Asian pack in terms of our preference for markets," Sriram said.

“Although the longer-term growth prospects for India have definitely improved post the general election and the impact of a majority in Parliament is already turning evident with reduced disruptions of sessions, high level of ownership of Indian assets among FIIs and above mean valuations make us more muted in terms of return expectations from the market," he added.

Among the 30 Sensex stocks, Maruti Suzuki India Ltd and Axis Bank Ltd saw their market capitalization rise by more than 50% so far in 2014, while Wipro Ltd was the only Sensex stock to see a decline in market capitalization. Its market capitalization eroded by 1.3%.

All sectoral indices saw a rise in their market capitalization since the start of this year, with the BSE Consumer Durables Index rising the most at 56.5%. The BSE Auto Index and the BSE Capital Goods Index added 48.5% and 42.3%, respectively.

“Within sectors, we are positive on the industrials and capital goods space given the focus that policymakers have on bringing about a manufacturing recovery. Relatedly, capital-intensive sectors such as non-ferrous metals, utilities (power) and telecom are also areas we like," Sriram of HSBC said.

“We continue to be constructive on the private banks. We are negative on ferrous metals and consumers. Though we like the energy sector on falling under-recovery, valuation run-up makes us believe that near-term returns may be more muted from this sector," Sriram said.

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Published: 21 Aug 2014, 12:07 AM IST
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