After under-performing the MSCI World Index for two consecutive years in US dollar terms, the Sensex has so far this year outperformed the global benchmark by almost 5%. The largely better-than- expected third-quarter results and a Budget without negative surprises for the market and the strength in the Indian rupee since the beginning of the year has aided this outperformance.
The only other major equity indices that have outperformed the Sensex during this period are the Brazilian Bovespa, which rose by 11.7%, and the South Korea’s Kospi, which gained up to 7.9%. According to a report by Credit Suisse, India is the fifth-best performing market year to date globally.
“In the first five weeks of 2017, Indian equities have outperformed global equities by 10%, nearly reversing the under-performance in November-December 2016,” it said in a note to investors.
Credit Suisse also added that the post-demonetisation under-performance of the Sensex had seen its relative price to earnings ratio vis-à-vis MSCI World drop to a decade low of -1%, which, after the recent outperformance, is at a positive 5%.
According to Bloomberg data, while MSCI World is currently trading at 16.28 times its 12 months forward earnings, the Sensex on Tuesday closed at 16.55 times its forward earnings. However, despite the better-than-expected corporate results in the third quarter and the buoyancy in the market, earnings per share estimates for the Sensex have continued to fall since the start of the year.
Data from Bloomberg reveal that the consensus analyst estimate for the Sensex’s 12-month forward earnings has dropped by Rs 41.65 per share or 2.4% since the start of the year. However, analysts at Credit Suisse said that it is the pace of earnings cuts that matters to the market rather than the cuts themselves and the markets start to worry only when the pace falls below the roll-forward growth. “This pace has declined since November, but isn’t negative yet,” they observed.