The chart shows you how the Indian markets have outperformed both the global and emerging market indices in practically all sectors during the last three months.
In sectors such as capital goods, metals, real estate and banking, returns from the Indian markets in the last three months have been far in excess of those from other emerging markets.
The chart takes the three-month returns from the MSCI Emerging Markets Index and the MSCI World Index (in local currencies) and compares these with the three-month returns from the various Bombay Stock Exchange (BSE) sector indices. The indices are different and the comparison of the rates of return will be affected by that, but the results do show that investment in almost all sectors in the Indian market would have led to higher returns in the past three months.
Also See India Outperforms (Graphics)
The only sector that has given returns that are comparable with the average for emerging markets has been the FMCG (fast-moving consumer goods) sector, which comprises home and personal care products.
The Bank of America-Merrill Lynch survey for June showed emerging market fund managers were overweight on consumer discretionary (this includes autos), energy, financials (this includes real estate) and telecoms, and underweight on consumer staples, healthcare, materials, technology and utilities in June. Consumer staples, information technology (IT) and healthcare have been the worst performing BSE sector indices in the last three months.
Global fund managers in the Asia-Pacific ex-Japan region, however, were overweight on energy, banks, staples, insurance and materials, while being underweight on telecoms, technology, autos, industrials, media, pharma and utility stocks, with the last being the highest underweight.
With metals, capital goods and real estate having run up so much, surely it’s time to take a breather and rotate back to the defensives? That thought has been exercising the mind of many equity strategists. The latest CLSA “Bits & Pieces” report says that it’s time to look at stocks that have not done as well as the market in the last three months.
But take a look at the chart giving one-year returns. Notice that returns in IT services, healthcare and, surprisingly, real estate have been lower than the emerging markets’ average in the past one year. That could be the reason why some analysts continue to believe that there’s value left in these areas. For instance, Nomura believes that, in spite of the recent run-up in the real estate sector stocks, “for Unitech Ltd, Indiabulls Real Estate Ltd and Puravankara Projects Ltd the market has still not completely built in the potential positives, and these companies offer good value”.
To be sure, it may pay to be cautious and look at sectors that have underperformed over the past three months. But whether that will work in the Indian context is doubtful.
The BSE Capital Goods Index may be expensive, trading at a trailing price-earnings multiple of 25.7, but so is the FMCG Index, which is currently at a trailing price earnings of 25. While there certainly are instances of decent valuations in individual stocks, the market as a whole is now overvalued.
Graphics by Ahmed Raza Khan / Mint
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