Mumbai: Just four months ago, hedge fund manager Supreeth Shankarghal predicted the only way for India stocks to go was up. Now that almost everyone agrees, he says it’s time to sell.

The manager of $100 million in options at QF Assets Ltd in Bangalore, whose call in May preceded a 13% rally in the BSE Sensex, says stock investors are underestimating risks after valuations rose to a 15% premium over the three-year average. India is the only one of 12 major markets where the stock index rose to a record this year and the cost of using options to protect against losses slumped to an all-time low.

India sceptics like Shankarghal are becoming harder to find as foreign and local investors pile into equities, analysts predict further gains and even Jeffrey Gundlach, the US bond fund manager at DoubleLine Capital LP, says stocks in Mumbai are the most attractive worldwide. While bulls point to prospects for faster growth after Prime Minister Narendra Modi won the biggest election victory in three decades in May, Shankarghal says the combination of expensive valuations and reduced US monetary stimulus will spur losses.

“The market has run way ahead of the story," Shankarghal, 27, the chief executive officer at QF Assets, said in an interview on Thursday. “Risks are huge."

The rally, which sent the Sensex to a record close on 45 days this year, has shown signs of losing momentum this week. The index fell in each of the past three days, dropping 1.2% from a record high of 27,319.85 on 8 September amid concern the US will begin raising interest rates faster than previously estimated.

Extended rally

Those declines pared the Sensex’s gain this year to 28%, still four times bigger than that of the MSCI Emerging Markets Index. The Indian gauge is valued at 15.7 times projected profits for the next 12 months, near this year’s high of 16.3 times and up from the three-year mean of 13.7 times, data compiled by Bloomberg show.

The Sensex has gone 373 calendar days without a drop of at least 10% from a recent peak, three times longer than average during the past decade.

“Markets are no longer cheap," Sankaren Naren, the chief investment officer at ICICI Prudential Asset Management Co., which has $19.4 billion, said in a Bloomberg TV India interview in Mumbai on 10 September. “There could be a correction."

Stock inflows

Traders are showing little concern that equities will decline. The India VIX index, a gauge of protecting against stock-market losses using options, closed at a record low of 12.5 on Thursday. All 30 companies in the Sensex have gained this year, the broadest advance since 2003.

International investors have plowed a net $14 billion into local stocks this year. Local mutual funds turned net buyers after Modi’s win, purchasing $2.5 billion of shares in the four months through August, data compiled by Bloomberg show. Strategists surveyed in July predicted the Sensex will advance to 28,143 by the end of the year, while DoubleLine’s Gundlach said this week that India is his favorite stock market from a long-term perspective.

When the Fed first signaled plans to phase out stimulus in May 2013, the Sensex fell for three straight months. It lost 7.2% during the period, while the India VIX surged 57%. Low volatility across financial markets may signal investors are underestimating how quickly the Fed will raise interest rates, researchers at the San Francisco Fed said in a report on 8 September.

Shankarghal is advising investors to book profits and put money into liquid funds. “Stocks must drop by at least 5%, or else it will be the making of a bigger bubble," he said. Bloomberg