Both the Sensex and the Nifty reached two-year highs on Monday. In the last 12 months, India’s market capitalization has risen by 40%, or double the rate at which world market cap has increased (21%), according to a report by Motilal Oswal Securities Ltd. The broker also added that India’s share of world market cap stood at 2.5% in February, above its long-term historical average of 2.4% (see chart).
Indian stocks have rallied lately thanks to sustained inflows from domestic mutual funds. What’s more, after a retreat late last year, foreign investors are returning to Indian equities thanks to fading worries about the adverse impact of demonetization.
This high optimism is reflected in the valuations at which Indian markets trade. Indian equities are trading at 17.6x estimated earnings for fiscal year 2018 and all key markets continue to trade at a discount to India, said the Motilal Oswal report, adding that India’s superior return on equity is an important differentiator for a valuation premium.
To be sure, some broking firms still see more upside left. Recently, Morgan Stanley raised its base case target on the Sensex to 33,000 points for end-2017, citing strong demand for Indian equities from domestic institutional investors and the likelihood of the beginning of a new merger and acquisition cycle.
But although the impact of demonetization on corporate earnings and GDP data has not been as severe as anticipated earlier, going ahead, domestic factors like earnings growth momentum and timely implementation of the goods and services tax would decide whether India continues to enjoy a high premium over other markets.