Mumbai: Indian equities are now being categorized as defensive bets, thanks to their ability to be resilient in tough times, but the gush of flows has pushed valuations in the expensive bracket, according to market analysts.

“That is one adjective I increasingly hear—India is a defensive market. It is viewed as a defensive-cum-growth market as well, because there are enough companies that are growing at 20%-plus," Abhinav Khanna, managing director and head of equity at Citigroup Global Markets India Pvt. Ltd, said in an interview on Thursday, referring to his conversation with his foreign clients.

Khanna pointed out that some of the large private sector banks in the country were reporting 20% growth for some quarters and cement companies too were faring well.

“There are so many sectors, and there are so many companies that are defensive because they have got good balance sheets, and also good management. So people see comfort in that, as opposed to investing in other countries where there may be political instability or countries which might have a very commodity-heavy bias," said Khanna.

“India is a very balanced market in that respect, and that is what gives it the defensive quality," added Khanna.

His views were echoed by foreign institutional investors (FIIs) as well.

“Indian equities are driven by long-term domestic factors, and not so much by short-term global factors. This makes India a defensive markets within a GEM [global emerging markets] context," said Maarten Jan Bakkum, senior strategist [emerging markets], NN Investment Partners, in an e-mail from The Hague, Netherlands. The asset management firm manages £190 billion of assets.

Bakkum warned that on the flip side, the high valuations mean that the market is always vulnerable in case of a negative surprise.

Other foreign asset managers shared the view.

“India is my long-term favourite among the big Asian markets, but considering current valuation, I see currently more upside in smaller Asian markets like Philippines, Vietnam and Pakistan," Helsinki-based Hertta Alava, director of emerging market funds at FIM Asset Management Ltd, said in an email on 27 July.

“When looking at all emerging markets, including commodity producers, I consider India quite defensive market which should outperform during uncertain times. Russia and Brazil have outperformed this year, but oil price is coming down again, so further outperformance might be limited," Alava added.

FIIs have been net investors in Indian shares for 27 sessions in a row, the streak last seen in 2013, when they were net buyers of Indian shares for 31 trading sessions, starting from 3 October 2013 to 20 November 2013. Year-to-date, they have pumped in a net of $5.3 billion in Indian shares.

That said the streak of continuous inflows and the fact that earnings upgrades aren’t coming by are making the valuations stretched, a concern that was widely shared.

According to data from Bloomberg, BSE’s 30-share Sensex trades at 17.42 times one-year forward earnings. In comparison, the MSCI EM Index trades at 13.49 times one-year forward earnings.

“While India’s absolute valuations are looking stretched, valuation premium relative to other EMs has stayed intact owing to strong rally in most other EMs too. At current levels, the market [MSCI India Index] is trading at around 18 times one-year forward earnings, this is about one standard deviation above a 10-year mean," Khanna of Citigroup said.

“A lot of people are asking about possibilities of earnings upgrades given the level of valuations, and the concern is that the market is clearly factoring something like a mid-teens earnings growth," Khanna said, referring to his foreign clients.

Bakkum of NN Investment also pointed that valuations of Indian markets remain stretched, compared with other emerging markets and also compared with India’s market history. Sensex and MSCI India Index have had a five-year historical average of 15.59 times and 16.03 times price-to-earnings, respectively.

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