BackIndia may not be the biggest beneficiary of EM equities rebound
Ever since signs of a recovery emerged, markets have rallied, with India's benchmark equity index BSE-30 rising 12.48% since 11 February so far
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Mumbai: Even as emerging markets (EMs) roar back to life, Indian equities may not be the biggest beneficiary in this rally, as recovery in the oils to metals pack makes the beaten-down commodity producing markets relatively more attractive.
That said, Indian markets are not staring at a correction either, and could see more or less in-line performance, as compared with broader emerging and regional markets.
Ever since signs of a recovery emerged, markets have rallied, with India’s benchmark equity index BSE-30 rising 12.48% since 11 February so far. The broader MSCI EM Index is up 15.02% in the same period, when converted to rupee terms for the sake of fair comparison.
The rally in commodities started around mid-January, with The Bloomberg Commodity Index of 22 raw materials which had touched an all-time low of 72.33 on 20 January, rising 10.47% since then.
Brent crude which had touched $30.14 per barrel, its lowest since November 2003 on 20 January, is up 37.03% ever since to $41.3 per barrel on Monday.
There was a sigh of relief as the US Federal Reserve adopted a gradual approach to its rate-increase cycle, triggering the risk appetite of global investors.
On the domestic front, things look pleasant for India in the near term, as Asia’s third-largest economy looks all set to welcome above average rainfall after two years of poor rains. Also, inflation slowed down while industrial activity looked up, recent data showed.
Earlier this month, India Meteorological Department predicted monsoon rainfall will be 106% of the long period average which is above normal and there is a 94% probability that monsoon will be normal to excess.
After three consecutive months of contraction, factory output grew 2% in February due to strong performance by mining and electricity sectors, while retail inflation moderated further in March, government data showed last week.
India’s wholesale price index (WPI) fell for the 17th straight month in March, declining by an annual 0.85%, driven down by tumbling prices of oil and manufactured goods data showed on Monday.
“I would rank India a ‘market perform’. It will perform in line with broader trends, but not outperform other Asian and emerging markets in the near future," said Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd.
“The recent rally globally is triggered by a recovery in commodity prices. So, those countries which are primarily commodity producers tend to benefit the most, in terms of this development," added Sharma.
Hertta Alava, director of FIM Asset Management Ltd in Helsinki, Finland, which manages around $300 million euros of emerging market assets, agrees that this is her base case too—that commodity-producing countries could receive wider investor attention in the days to come.
Commodity-driven markets such as Brazil, Russia and Indonesia have all gained recently. Brazil’s Bovespa, Russia’s Micex and Indonesia’s Jakarta Stock Exchange Composite Index have risen 33.33%, 9.48% and 1.88%, respectively, while India gained 12.48%, from 11 February to date. To be sure, Russia and Indonesia had started to gain even before the rally resumed in India.
While Sensex trades at 16.09 times 1-year forward price to earnings (PE), Indonesia’s Jakarta Stock Exchange Composite Index, Philippines Stock Exchange PSEi Index and Malaysia’s Kuala Lumpur Composite Index trade at 16.92 times, 18.30 times and 16.50 times 1-year forward PE, respectively.
Sensex, though, is currently less expensive than some of its emerging markets peers, and these other markets look set to attract better inflows.
Meanwhile, Brazil’s Bovespa and Russia’s Micex trade at 15.10 times and 7.30 times 1-year forward PE, as they were battered down for some time earlier, due to carnage in world commodity prices. China’s Shanghai Composite Index, on the other hand, trades 13.29 times 1-year forward PE on concerns over slowdown of the growth engine in the world’s second-largest economy.
“Many other emerging and Asian peers look cheaper in comparison to India, mainly as they were battered down heavily due to the fall in commodity prices," pointed Sharma of First Global.
Also, India trades at a premium of 13% to its 5-year historical average of 14.24 times, but it now seems justified in the hope of good monsoon, which could eventually help to lead to better corporate earnings.
“I see valuation quite reasonable now. India is never the cheapest market, but relative to its own history, it looks quite fair," Alava of FIM said.
“After Narendra Modi-related rally in 2014, stocks were very expensive, but now hot money has left India and valuation looks better. Especially if monsoon will be good and support growth in rural area, then there could be some upside in earnings estimates, which would be something we haven’t seen for a while," Alava added.
Since the Modi-led National Democratic Alliance assumed power at the Centre in mid-May 2014, Sensex is only up 8.15%. It had rallied to a record high on 4 March 2015, but is down 14.02% since then.
Foreign portfolio investors pumped in a net of $1.1 billion in Indian shares in the year so far, thanks to huge inflows since March. In comparison, Brazil has received $2.9 billion, while Russia attracted $4.7 billion, data from Bloomberg showed.
For now, the inflows are likely to continue in emerging markets, and India will enjoy its share too, albeit less than some other markets, which are looking up after a huge decline.
“Due to risk-on trade, EMs will receive decent inflows, and India too, will benefit, but not to the extent of other markets such as Brazil, Russia, Indonesia and the likes. India is a net commodity importer; so to that extent, those higher costs are going to hurt," said Sharma.
“The flows will be stronger towards the beaten-up commodity-driven markets and they will rally more in comparison to India," added Sharma.
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