Mumbai: The transformation of India’s Sensex, from being a darling of global investors for its multi-year huge returns to becoming a pariah, is underscored by its near 53% fall so far this year.

That plunge compares to a 44% fall in the MSCI World Index, a benchmark of developed and emerging equity markets, and the relatively benign 35% fall in the FTSE and the Dow Jones Industrial Average, both from markets that were actually at the epicentre of a financial upheaval with ongoing tremors worldwide.

With overseas investors pulling out money from India and seemingly reluctant to come back in any meaningful way ahead of national elections due before May, market observers remain cautious about predicting any quick rebound in 2009 even if India’s gross domestic product growth will likely be among the top ranked economies next year.

In many ways, India wasn’t unique in seeing investors, especially foreign institutions, abandon domestic equities. Amid a continued liquidity crunch as well as ongoing uncertainty over the health of most companies, investors have either stayed out of markets entirely or moved toward treasuries and gilt securities, which are considered safe against the risk of default.

Also See Fading Charm (Graphic)

Credit Suisse Group AG dubs 2008 as the biggest correction in Asian markets since 1970 and it isn’t particularly bullish about 2009 either.

“Economic datapoints that were causes of concern, such as inflation, and the trade and fiscal deficits are expected to improve drastically, yet the damage to confidence means that growth is unlikely to return in a hurry," research analysts Sakthi Siva and Kim Nang Chik wrote in a report from the Swiss bank.

It isn’t that among emerging markets India was the pits. Indeed, the Shanghai Composite, China’s benchmark index, has fared even worse, having lost nearly 65%.

But on the back of expectations of higher growth in 2009, major investors and analysts alike continue to cautiously keep the faith in China’s equities.

In countries such as India, Taiwan, Thailand and the Philippines, “there is a very tight relationship between net fund flows and equity market performance", writes Clive McDonnell, head of equity strategy at BNP Paribas Securities (Asia) Ltd.

In 2006 and 2007, $25.3 billion (Rs1.2 trillion today) of foreign portfolio inflows sparked a bull run that saw the Sensex yield annual returns of at least 45%. However, as Mint reported on 24 December, in 2008, foreign institutional investors (FIIs) have already pulled out at least $13 billion from India, the first net outflow in 11 years and the most in 15 years.

According to the International Monetary Fund’s World Economic Outlook, private capital flows into Asia peaked in 2008 at around $300 billion, about 55% of total flows into emerging markets.

The International Monetary Fund predicts capital inflows to these markets would fall about 92% to $22 billion in 2009.

If that pans out, it would surpass the 60% reduction in fund flows seen in 1998, when Asian markets were wracked by a currency crisis that saw a run on the Thai baht and Indonesian rupiah, among others.

As for India, the price-earnings (P-E) multiple, a common tool to evaluate stocks, has already halved during the year as corporate earnings took a beating. The P-E multiple for the Sensex fell from 27.67 in January to about 12.25 at the end of the year. A lower multiple typically suggests that a stock is cheap though it is by no means the only measure used by investors to evaluate a stock.

Another widely followed valuation, the price to book ratio, or the ratio of market value to its book value—the sum of equity and free reserves—for the Sensex is now at 2, marginally above its historical low of 1.67 in October 1998.

But “investor confidence is still shaky" in India, Lorraine Tan, director of research at credit rating firm Standard and Poor’s equity research division, recently told Mint. “We are neutral on India." She noted that “India is not expensive" though it could be ripe for stock-picking, or buying very selectively.

Other analysts, such as Tan of Standard and Poor’s and McDonnell of BNP Paribas, currently have a “neutral" rating for India for 2009, which is actually an upgrade from their “underweight" ratings a couple of months ago. And Siva and Chik, the Credit Suisse analysts, despite their concerns about the lingering damage to confidence, actually have an “overweight" rating on India, which means they are recommending investors to buy Indian stocks.

They caution, however, that while the Sensex may repeatedly hit the 9,000 points mark (it is at 9,568.72) ahead of national elections, in the second half of 2009 the stock market could “rebound sharply if the general elections end with a conclusive result and a reformist government".