The Indian equity market has underperformed most of its peers from Asia Pacific in the year to date, except Hong Kong and Taiwan. Indian shares have become less expensive and are now trading below their long-term PE average of 15. Yet, our market still trades at a premium to its Asian counterparts.
The sharp correction has helped improve our valuations. While our market was trading at a PE multiple of 18.7 in January this year, it currently trades at a multiple of 14.4, below its long-term average of 15. Yet, the valuations are much higher than what they were in October 2008, when our market was trading at PE multiples of around 10 times.
Market participants attribute several reasons for our underperformance this year. First, inflation has proven to be quite sticky and the central bank has had no choice but to raise interest rates to tackle the problem. Second, our current account deficit has resulted in weakening of the rupee, much more against the dollar compared with currencies from the Asia Pacific region and other emerging economies.
Third, the government?s reform process has been hobbled off and on by a spate of scams and governance issues. ?There has been a sort of policy paralysis and the government has been slow to execute projects, especially in the infra space,? said Bhupinder Sethi, co-head – equities, Tata Asset Management.
According to a recent research report by Nomura, a policy logjam prevails at present but decision making has improved to some extent. Corporate investment cycle is weak and lack of skilled manpower is a constraint that corporate India faces and is increasingly becoming a bottleneck, the report adds. Reforms such as FDI in retail and GST may be delayed significantly owing to a lack of consensus, says the report.
The pullback from overseas investors has not helped either. In the year to date, foreign institutional investors (FIIs) bought equities worth $0.04 billion compared with purchases of about $29 billion in 2010. According to a report from Kotak Institutional Equities dated September 5, India along with its emerging market peers witnessed strong outflows amid a global correction in the past six months with equal participation by ETFs and non-ETFs. Allocations to India by Asia ex-Japan funds are currently about 10.5%, down 1.5% in the past 12 months, the report added.
However, market participants are hopeful that India?s long-term growth story will bring them back. ?Growth companies with good quality businesses, strong management capabilities and focus on capital efficiency will be a major draw,? said Sethi.