The Indian stock markets rallied fiercely on Thursday, gaining 427.83 points and propelling the Sensex to an all-time high of 20,893.57. It was nearly three years back on January 8, 2008 when the 30-scrip Sensex had closed at the previous high of 20,873.33. Today, India?s market capitalisation now stands at $1.66 trillion, way below China?s $3.87 trillion but much above those of Asian peers like Korea, which has a market capitalisation of $1.03 trillion and Taiwan?s $0.8 trillion.
The rally was fuelled by the abundance of liquidity across the world seeking returns in emerging economies as bond yields in the developed world drop to new lows. FIIs have bought close to $27 billion worth of equities so far in 2010, the highest in any year since they were allowed into the Indian markets in 1992. On Thursday alone, FIIs are reported to have bought more than $1 billion worth of stocks, including the newly-listed CIL. With $600 billion expected to flow into the system as part of Quantitative Easing II, flows into emerging markets including India could remain strong.
Said Deepak Parekh, chairman, HDFC: ?The index is a barometer for the economy. We are the second-fastest growing economy in the world and should grow at a near to 9% GDP. Foreign investors are looking for investment opportunities and find our markets attractive.?
Andrew Holland, CEO, equities, Ambit Capital, observed that globally, many pension funds were increasing their India weightage and so, a re-rating of the market was probably warranted. ?We see the Sensex at 23,000 by March 2011,? Holland said. Currently, global funds (or those benchmarked to the MSCI World) put together have just about 0.65% of their assets in India ? an underweight position of 0.38% compared with the benchmark weight of 1.03%. Even a move to a neutral position on India could mean an inflow of nearly $7 billion given that these funds today have a corpus of around $1.7 trillion.
Adrian Mowat, chief Asian and emerging market strategist at JP Morgan, had recently observed that the Indian economy should see robust growth and given that, valuations were justified. ?Investors are chasing yields and their confidence in developed market equities is low, which is understandable,? Mowat had observed. India is today among the most expensive markets in the world trading a P/E (price/earnings) multiple of close to 21 times ? far higher than 15 times for Brazil and just over 14 times for Korea. India?s 12-month trailing PE premium versus Emerging Markets has risen to 50%.
FIIs today own about a fifth of India?s market while domestic insurance companies own around 5% and mutual funds less than 4%. Although India?s factory output in August was a subdued 5.6%, the average industrial production between April and August has been a fairly good 10.6%. Moreover, corporate earnings are estimated to grow by about 20% for the next couple of years.
Philip Poole, global head, emerging market research, HSBC had pointed out some time back that while 8% was undoubtedly a scintillating number compared with 2 or 3%, there were some concerns, in the near term, the biggest of which is related to earnings growth which is in moderation mode. In the September 2010 quarter, net profits for a clutch of 911 companies (excluding banks) grew a remarkable 53% year-on-year, although that was largely propped up by other income, which rose even more by 62% year-on-year.