A rally in Indian stock market to a record high is masking an underlying weakness - the market has been lifted by just a handful of stocks of exporters reaping the benefits of a slump in the rupee.
When Indian shares powered to a record high in January 2008, it marked the peak of a six-year rally in an economy with enviable average growth of 9 percent that was hot on the heels of China. India was tipped as the next Asian powerhouse.
This time around the disconnect with the economy could not be greater.
"The economic environment of 2008 and now is very different," said Aneesh Srivastava, chief investment officer of IDBI Federal Life Insurance in Mumbai.
"Then, we had strong economic growth and strong earnings growth. Today, the currency is a challenge. We have policy paralysis, an economic slowdown, and global risks," he said.
India's economy is growing at its weakest pace in a decade and the currency, which slumped to a record low in August, is barely out of the sick bay. Consumer spending and corporate investment is weak and a minority coalition government is paralysed as it stumbles towards national elections in the face of an invigorated opposition under a business-minded leader.
Yet, India's benchmark stock index, the BSE Sensex, rose on November 3 to a record high and is on the cusp of reaching a new peak as foreign investors pile into the market targeting India's exporters who are benefitting from the weakness of the rupee.
They have made net purchases of $17.6 billion so far this year, making India the number one recipient of overseas stock investment in emerging Asia, Deutsche Bank figures show.
The result is that since the rupee and stocks hit their lows in late August, the BSE index has risen 20 percent off the back of the foreign money and despite heavy selling by sceptical domestic investors.
The rise in the BSE index, widely known as the Sensex, has been fuelled almost exclusively by exporters such as software services provider Tata Consultancy Services (TCS) and Sun Pharmaceuticals Industries, both of which are up close to 60 percent this year.
Information technology and pharmaceutical exporters have benefitted from an improving outlook in the U.S. economy and a dollar earnings stream. The rupee, which at its record low had fallen 20 percent this year, is now down 11 percent since the start of 2013.
Illustrating the rupee effect, the BSE index is Asia's fourth-worst performer in dollar terms, having fallen 3.9 percent since the start of the year.
Just 10 stocks in the 30-member Sensex have outperformed the index itself this year and the six top risers are all exporters.
HAS THE MARKET PEAKED?
Anusha Mannick, a fund manager at Rogers Capital in Mauritius, said investors like her have been attracted by relatively low valuations and a weak rupee that made shares relatively cheap.
Thomson Reuters Streetsight data shows Mannick's fund emphasised investment in pharmaceutical companies, including drug makers Strides Arcolab Ltd, Glenmark Pharmaceuticals Ltd and IPCA Laboratories Ltd.
Further signs of improvement in the U.S. economy, such as a pick up in the jobs market seen in data this week, could spark more gains for exporters.
But some investors worry the upside potential for India is now waning after such a strong run up. Both Tata Consultancy and Sun Pharma hit record highs in October, but have each fallen around 12 percent since.
Other markets may also start to look attractive.
The MSCI India IT sub-index trades at 21 times earnings forecasts for the year ahead, well above the 12 times for the equivalent index for Asia-Pacific countries outside of Japan and 18.4 globally .
The MSCI health care sub-index, which includes pharmaceutical companies, is starting to look similarly stretched.
Another factor that could weigh on Indian stocks is a reduction in the U.S. Federal Reserve's monetary stimulus.
Fed tapering fears earlier this year hit India badly, with overseas investors selling a net $3.7 billion of shares from June through August.
"I think we will see funds moving out of emerging markets like India to the developed world on Fed tapering," said Mannick, of Rogers Capital.
"I think export-based stocks gaining on just a lower rupee would not play for long, so therefore there would be some profit booking," she said.
THE INDIA STORY
Having made a record $11.7 billion in net sales between January and November, domestic investors are showing little inclination to take up any slack if foreign money pulls out.
A lack of fresh economic reforms to drive fixed-asset investment has weighed on India's economy for two years. In the fiscal year to March 2013, growth dropped to just 5 percent, its lowest pace in a decade and is expected to slow further in the current fiscal year.
Shares of companies tied to India's domestic economy have tumbled this year, some quite badly and the earnings outlook for non-export blue chips remains poor, analysts say.
India's biggest power equipment maker, Bharat Heavy Electricals Ltd (BHEL), is down 25 percent this year after hitting its lowest levels in about eight years.
State Bank of India (SBI), partly owned by the government, has dropped more than a fifth as lending demand cooled. In November, it reported its steepest quarterly profit fall in more than two years.
"A new economic cycle is starting, but nobody has the courage to buy meaningfully into economically sensitive sectors like capital goods, construction, realty, or public sector banks," said Samir Arora, a fund manager at Helios Capital Management in Singapore.
Many potential buyers are pinning their hopes on a victory by the opposition Bharatiya Janata Party, widely seen in markets as being more business friendly, in general elections due by May.
A key indicator of its strength comes on Sunday when India will post results for a handful of state elections.
Still, national elections are months away, and could yield a divided mandate and a weak coalition government, the result investors fear most.
With such uncertainty, domestic investors find it hard to buy into the rally.
"A structural bull market cannot be there in an environment which is so challenging," said IDBI's Srivastava.
"Structural bull markets need earnings and macro-economic support. So if markets go higher it will be an unsustainable high, if expectations are not fulfilled accordingly."