Indian markets have witnessed robust inflows from overseas investors to the tune of $4.1 billion in this calendar year. It is second only to South Korea in the Asia-Pacific, which has received $4.8 billion so far. However, if one were to look at current market valuation across the Asia-Pacific, South Korea, Taiwan, Japan, Hong Kong and Indonesia look far more attractive. Could this signal a shift of FII portfolio away from India?
According to the Bloomberg consensus estimates for FY 2011, the earnings (as in earnings per share) of BSE Sensex companies are expected to grow by over 27%, the highest in the Asian region. In comparison, earnings growth will be 18.40% for Hong Kong, 21.46% for Indonesia, 11.78% for South Korea and 15.94% for Taiwan. This, by itself, could be a good trigger for allocating more funds towards India, since returns usually mimic earnings growth over longer periods of time.
But then, current market valuations also play an important role. Currently, the Indian equity market seems fully priced, considering the fact that Indian markets have historically quoted at an average price-to-earning multiple of 17 and the 2011 forward PE is 14.3. This leaves little headroom for a further run-up in Sensex values, according to experts.
In contrast, Kospi is quoting at a higher discount of 46.8%. Its forward price earnings for FY 2011 is 9.7, against its long-term price-to-earning multiple average of 14.24. Similarly, FY 2011 forward earnings multiple for Taiwan is quoting at a discount of 33%, while Indonesia and Hong Kong are quoting at a discount of 24% and 23% respectively to their respective long-term average. All these markets are quoting at a higher discount to that of Sensex, which is quoting at a 19% discount.
The strong FII inflows into Indian equities despite higher relative valuations have, in fact, surprised many analysts. ?What surprises us is the difference between sentiment and reality,? stated Credit Suisse in its recent report. The report said: ?India did not rank highly in our AIC survey as the market likely to be the top performer in 2010, but it was associated with $4 billion of net foreign buying (or 30% of net foreign buying, despite its weight being 22%). Indonesia ranked highly in our AIC survey, but only saw $0.6 billion of net foreign buying (4% of flows versus a 6% weighting).
An analyst at Enam securities feels that Indian markets will be a key beneficiary among emerging markets on the back of dollar carry trade in the immediate term. However, it warns that India at current valuations is greatly susceptible to any global capital flow breakdown this year.