BackNifty closes above 10000, but is India less attractive for FIIs now?
A comparison of stock valuations with those of emerging markets shows India has now become relatively less attractive for foreign investors
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Mumbai: A day after it first flirted with levels above 10000 points, the benchmark Nifty index on Wednesday closed above the mark for the first time. While stock valuations are expensive, a comparison with those of emerging markets as a whole shows India has become relatively less attractive now and the key contributor to the rally is global liquidity.
The 50-stock Nifty closed at 10020.65 points, up 0.56% from its previous close, lifted by a stock split announcement by Yes Bank Ltd and gains in metal stocks. The BSE’s 30-share Sensex rose 0.48% to close at 32382.46 points.
While the Nifty is now the best performer among the bigger global equity markets in 2017, barring Hong Kong’s Hang Seng index, it is seen as part of a global stocks rally fuelled by central bank asset buying.
“Global liquidity has been flowing into India, in tandem with other markets. Liquidity chases market performance, earnings growth and strong macros," said Gautam Duggad, head of research, institutional equities, at Motilal Oswal Financial Services Ltd.
To be sure, Indian stocks as a whole enjoy some tailwinds: higher economic growth expectations, good monsoon rains that are expected to lift rural incomes and expectations of an interest rate cut that may fuel spending.
However, this hasn’t led to any optimism in earnings expectations. The Nifty now trades at 18 times expected one-year forward earnings. While that makes India one of the most expensive markets in the world, the premium it enjoys over other emerging markets has come down.
MSCI India’s price-earnings ratio is now about 40% higher than the multiple for MSCI Emerging Markets. About two years ago, this premium was more than 65%, showing that India’s relative attractiveness has come down since then.
That also means the current rally in Indian markets is being lifted by a global tide of liquidity as a result of central bank asset buying. MSCI Emerging Markets has risen 19% this year to date, while MSCI World, a proxy for developed markets, has gained 12%.
Foreign institutional investors have bought a net of $8.73 billion in equities while domestic institutional investors have bought a net of Rs24,126.87 crore.
“Liquidity may soon dry up once Indian markets start correcting. First fall in the markets may see some ‘buy on dips’ but subsequent decline in equities is likely to see outflow of funds from India," said Ambareesh Baliga, an independent market analyst.
The next keenly awaited trigger is the US Federal Reserve meeting, the outcome of which will be known later on Wednesday.
According to Bloomberg, investors see no chance of a rate increase in July, based on pricing in federal funds futures contracts.
“Globally, investors are also a bit cautious as they await the outcome of a two-day US Federal Reserve’s policy meeting... Markets will be watching for any indication of another possible rise in the benchmark lending rate in 2017, and on when the Fed will begin winding down its multi-trillion-dollar investment holdings," said Karthikraj Lakshmanan, senior fund manager, equities, at BNP Paribas Mutual Fund.
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