The BSE Sensex, at 24,606.99 points, is currently trading near its 10-year average of one-year forward estimated price to earnings (PE) multiple at 15.1 times, Bloomberg data shows. Among its peers, India is now the second-most expensive market after Indonesia which trades at a PE multiple of 16.3 times. In 2016 so far, the Sensex has given a return of 7.34% in US dollar terms while Indonesia has returned 10.61%.
Despite a correction of 17% over the last 14 months from the peak of 29,681 points in January, 2015, the Sensex continues to trade at 15 times forward because earnings estimates have been downgraded. Over the past year, estimates have been downgraded by 20%.
The forward price to earnings for Brazil and Russia are at 11.5 times and 6.1 times respectively. Whereas China’s PE ratio is at 11.6. Taiwan, South Korea, Hong Kong are currently trading with a PE ratio of 12.9 times, 11.2 times and 10.1 times respectively.
According to BNP Paribas’ Asia Strategy report released last month, after the recent correction, Indian market multiples have converged near long term averages and now appear to be factoring in most domestic headwinds.
“We believe the consensus earnings growth estimate for FY17 will come down 12-14% and the Sensex will provide a 19% return in 2016. We have a December 2016 Sensex target of 29,000 predicated on 14% EPS growth in FY17 and 5% rerating from present levels,” said the brokerage house. It added that global factors like the direction of the Chinese yuan, the likely trajectory of China’s economic slowdown, potential credit defaults in parts of emerging markets, and the impact on fund flows from Fed action are the biggest risks to our target price”.
The report also provided valuations of each sector revealing some sectors in India to be attractively valued relative to other Asian peers. These are Consumer staples, IT, Telecom, Industrials with a forward earnings multiple of 27.02 times, 15.40 times, 18.29 times and 17.08 times respectively. ‘The Chinese counterparts in almost all sectors are the cheapest, but China has other issues relating to sharp economic slowdown and currency volatility’, it stated.
In a recent report, Deutsche Bank said that Indian markets after Prime Minister Narendra Modi’s election is following similar patter as Japanese markets after PM Abe’s election; first year marked by euphoria, second year marked by disappointment and thereafter realistic optimism should materialize. “Investors believe that the election-driven euphoria has played out and the Indian markets can now move up sustainably only on the back of earnings recover. We sensed that emerging market (EM) investors have been pruning their overweight on India, with few EM fund managers even admitting to taking their positioning on India to a neutral weight “ added the strategy report dated February 24.
According to the foreign brokerage house, most investors admitted that it was difficult to find any compelling reason to invest in equities as sustainably lower commodity prices and China developments are likely to constrain economic fundamentals relative to EM peers, fund managers no longer found relative investment argument compelling in the current environment of redemptions from EM funds.