Even as Sensex and Nifty continue to scale new highs day-after-day, few prominent investors prefer sitting the rally out, wary of stretched valuations of Indian equities. France based lending and financial services behemoth Societe Generale said this week that the Indian equity market is ‘rather expensive’ at the moment, and that it will add exposure to the equities in the country only on dips.
“I think that it’s clearly an expensive market, and there will be probably a better timing to add positions if there is any kind of pullback later in 2017,” Xavier Denis, Global Strategist, Societe Generale Private Banking, said in an interview to BTVi yesterday evening.
Indian equity markets are on a sustained rally since the beginning of this year, supported by BJP’s recent landslide win in UP state elections, prospects of revival in corporate earnings, implementation of GST (Goods and Services Tax), expectations of good monsoon and an upmove in the global markets. The benchmark Indian stock indices Sensex and Nifty have made new all-time highs in four out of last six trading sessions, with the Nifty index topping 9,500 for the first time ever.
Societe Generale, which had a consolidated balance sheet worth EUR 1.4 trillion as on March 31, also has positive view about Indian equity market from a long term perspective, but is wary of a correction, Denis Xavier said. “I think there is clearly a risk of a pull back if there is any kind of disappointment regarding the implementation of reforms or if there is some kind of easing economic momentum,” he said.
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Denis Xavier further said that the good time to build up an increased positions in the Indian markets was when the market pulled back following the demonetisation. “It’s probably a bit too late to add exposure to the Indian equity market,” he added.
Of late, some other prominent analysts and investors have also raised concerns about the justification behind the rally. The cash holdings of equity mutual funds in India rose to an average of 6% of Assets Under Management (AUM) for the quarter ended March 31, a recent Bloomberg report said citing data from Morningstar Investment Adviser India Pvt Ltd. Such high proportions of cash in mutual fund portfolios — last seen at the end of March 2012 — may be an indicator of their reluctance to put in money into the markets at current valuations.
Earlier last month, renowned equity analyst Abhay Laijawala, Head, India Research, Deutsche Equities, said in an interview to CNBC TV18: “Before you really see any kind of upmove, you do need earnings to recover… At this time we are seeing that the expectations for FY18 appear to be on the higher side.” Laijawala also cautioned that transition to GST will disrupt earnings. “India’s taxation system is transitioning from a developing world system to better than developed world system, that has to have its transition impact. There will be a near term disruption.” he said.
Kotak Group is also cautious on the markets. Kotak Institutional Equities, led by one of the country’s top fund managers Sanjeev Prasad, in a strongly-worded note earlier last month, warned clients against the rapid rise in the equities markets without the support of corresponding fundamentals. “We are unable to fathom the rapid changes in the prices of stocks without any major changes in their fundamentals,” Kotak wrote in a note on April 25. “It seems to us that the sole investment thesis in some cases is ‘liquidity’, which is quite bizarre since ‘active’ investors should be deciding on the fundamental value of stocks rather than leaving it to a nebulous issue such as ‘liquidity’,” it added.