One big reason for this is that, globally, asset allocators have been in risk on mode for the better part of the year given the abundance of liquidity flowing from accommodative monetary policy stances of most central banks. But if India is getting more flows than peer markets like Taiwan or Korea, its because the market is betting on an earnings recovery in the not so distant future. There are a few signs of that yet and, at an aggregate level, the quality of the September quarter numbers was undoubtedly poor, with profits being propped up by other incomes. However, a study by Citigroup showed that 43% of the companies that it tracks grew profits by 20%-plus. Moreover, in the past few quarters, the earnings surprises on the upside have been more than those on the downside and the good news is that the Sensex FY13 earnings forecast of around Rs 1,210 didnt see a downgrade this season. So although management commentary remains cautious, its possible corporate profits are stabilising.
However, the process could take longer than the move in the market seems to suggest; after all, theres little happening in terms of clarity on key policies. Indeed, a downgrade of FY14 earnings, currently estimated at R1,415, cant be ruled out yet given that the global economy will take time to recover. Nonetheless, assuming no downgrades for the moment, at 18,842, the market trades at a shade under 14 times one-year forward earnings, below the historical average of 15 times. While a re-rating to a multiple of above 15 seems unlikely, a reversion to mean is quite possible, especially if the government follows up Moodys affirmation, of the outlook for India being stable, with some concrete action on investment clearances and policy reform.