The premium has traditionally been paid because of Indias robust domestic consumption story and the fact that the economy stands to gain from any correction in commodity prices in the event of a hard landing in China.
Whether investors will continue to pay a premium given how it is export-oriented stocks that are now driving up earnings thanks to a weaker rupee and, consequently, benchmark indices to all-time highs remains to be seen.
Strong foreign institutional investor inflows, which averaged $22 billion in the last two years a period in which Indias GDP grew at the slowest pace in a decade while the rupee hit its lowest prove that liquidity is as important as economic fundamentals. It is possible that a further taper by the US Federal Reserve will mean a little less liquidity and, therefore, allocations to EMs may come off somewhat, bring down the price-earning multiples of these markets. The findings of the latest BofA-ML survey seem to substantiate this the survey noted that rarely have such bullish growth expectations for EMs been mixed with bleak EM weightings. The latest correction in EMs, in which most of them lost 3-5% of their value in one week, is attributed to risk aversion ahead of the Fed policy review on January 28-29. Stocks plunged along with a sharp decline in EM currencies on fears the Fed may further taper its monthly monetary stimulus, now at $75 billion a month, by another $10 billion.