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Indian stock valuations still at a premium

Indian stock valuations still at a premium
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First Published: Wed, Aug 24 2011. 10 44 AM IST

Updated: Wed, Aug 24 2011. 10 44 AM IST
New Delhi: As European debt contagion and fears of another recession in the US sent stock markets across the globe into tailspin, analysts are increasingly getting worried about Indian equities. The ever-effervescent Samir Arora, fund manager at Helios Capital, feels ‘sapped’ of energy and fears that any hint of further deterioration in global economy can drive stock markets even lower. Read more...-
Samir Arora said in a interview to Bloomberg UTV:
I feel that the world is in a bad and uncertain state. Today the environment is such and so fragile that even if the world or global individual consumer confidence weakens, that itself can bring problems and a recession. The fear of 2008 still persists, which is why the stock market and other markets are reacting overly fast to everything.
One reason why negative sentiment engulfed the analyst community is the strong correlation between India and the US economy. According to Ambit Capital, the growth process in India is closely linked to economic activity in the US. And with the US staring at another slowdown, there are fears that domestic markets might slide further.
Saurabh Mukherjea and Ritika Mankar of Ambit Capital said in a strategy note:
India is far from insulated from these developments in the West. From the perspective of the real economy, India’s economic growth process remains critically coupled with the pace of economic activity in the US economy through the investment demand conduit. The relationship between the fate of the US and India extends to equity markets as well which have been moving in lockstep over the past few years. In fact the Sensex and the S&P 500 have exhibited a positive correlation of +70% since January 2008.
India’s investment demand remains ‘coupled’ to the US.
Another issue that is a cause of concern is the premium valuations of domestic equities. With high inflation, policy logjam and slowing growth plaguing India, analysts fear that foreign investors will evade domestic equities.
Saurabh Mukherjea and Ritika Mankar of Ambit Capital add:
India currently trades at an almost 40% premium to the broader emerging market pack (on a forward PE basis) as opposed to the long term average of around 25% (on a trailing PE basis over CY06-11). India remains expensive compared to peers despite high inflation, four consecutive quarters of weakening growth and political chaos (resulting in almost zero legislative activity in Parliament). It is unlikely that FIIs will turn buyers of India until India’s premium de-rates to its long-term average.
Overall, things have been muddled up for Indian equities. With global economy staring at a fresh slowdown, all one can hope for is encouraging policymaking by the government.
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First Published: Wed, Aug 24 2011. 10 44 AM IST
More Topics: Markets Update | US | Stocks | Valuation | Economy |