If the Sensex is at 20,000, it?s because foreign institutional investors (FII) are coming to India in droves. That?s evident from the numbers; already $16 billion worth of equities have been bought by FIIs in 2010 so far. It?s not as though there?s a fire sale on. As Morgan Stanley has pointed out, India?s 12-month trailing PE premium, versus Emerging Markets, had increased to 60% at the end of August and given that since then India has outperformed its peers it would have become even more expensive.
Looking at it another way, the Sensex, at 20,000, trades at a trailing twelve month PE multiple of close to 20 times while the Korean Kospi trades at a trailing twelve month of just under 14 times and the Taiwanese Taiex commands a multiple of 15 times. The Shanghai SE Composite trades at close to 18 times. So, compared with its peers, the Indian market is by no means cheap and even at a disaggregated level there are clearly no basement bargain deals to be struck. Indeed, valuations seem positively stretched, given that India Inc?s performance in the June 2010 quarter didn?t really live up to the Street?s expectations and that there could be downside risk to earnings estimates for future quarters. Citigroup makes a pertinent point when it says that the headline profits for the three months to June may have grown a robust 34%, but nearly 80% of this was generated by the foreign subsidiaries of Indian firms, which turned around, causing a huge swing in the numbers. The ?domestic only? earnings growth, the brokerage emphasises, was an anaemic 7.5%.
But the FIIs seem to be looking at the big picture; the promise of 8% sustained GDP growth for the next four or five years, driven by a large home market that will consume the goods produced and the potential for investment in a country lacking adequate infrastructure. Right now they seem to be willing to overlook the near-term concerns of high inflation, rising interest rates, a possible slowdown in exports, missing private sector investment and a government that?s not really rushing ahead with reforms because it?s struggling with other problems. They?re betting big on India because they believe it will be among the two or three larger economies left standing in an otherwise debilitated world and are willing to wait it out.
It?s hard to disagree with their perspective. There?s no doubt that India has a lot going for it and so even if the growth and earnings numbers don?t always come in as expected every quarter, there is enough entrepreneurial spirit and ambition to ensure that in the long run enough companies will deliver the goods. There?s too much evidence of that in enterprises like an Infosys or a Bharti Airtel to ignore and that?s what makes the country such an attractive investment destination.
Also, with the world?s biggest economies having been virtually brought to their knees in the aftermath of the global financial crisis, there is much respect today for the wisdom and prudence of the country?s central bank.
Indeed, given that emerging markets today are way less leveraged than their global peers and have many more profitable firms, there is a clear case for a re-rating relative to developed markets. Already emerging markets? share of world equity capitalisation moved up to around 25% in August from 22% a year ago. Since most emerging markets are now most certainly going to be growing at a much faster pace than developed economies, which could actually see a slowdown, this share is tipped to go up. Goldman Sachs forecasts that over the next two decades or by 2030, China?s market capitalisation may exceed that of the US. And even before that, BRICs? share of world equity capitalisation is tipped to grow to 30% by 2020 from the current 18%.
Seen in this context, the current run rate of nearly $2 billion a month that?s flowing into the market, whether through primary market issuances or the secondary markets, could well sustain for some more time. At a macroeconomic level, this would be driven by the quantitative easing that is already taking place, leaving the western world awash with liquidity. And because experts predict QE2 (that?s the second round of quantitative easing) is around the corner, money managers don?t really have too much choice when US bonds are fetching 2%. EPFR data indicates that global funds, which have close to $1.7 trillion in assets-under-management, have 0.65% of their assets in India, an underweight position of 0.38% compared to the benchmark weight of 1.03%. So, even if there are not further inflows into these funds, simply shifting to a neutral stance would result in about $7 billion flowing into India.
In addition, there are the Global Emerging Market (GEMs) Funds and Asia ex-Japan Funds that could potentially invest about $300 million a month. Fund managers back home, too, are sitting on reasonably large amounts of cash estimated at close to $9-10 billion. That?s probably what makes merchant bankers so confident that the IPO of Coal India and the follow-on issues of Power Grid or SAIL, which together are expected to target Rs 28,000 crore, will not be short of institutional takers. The huge supply of paper hitting the primary market this year might take some of the zing out of the Sensex, but that should soon be back.
shobhana.subramanian@expressindia.com