The Nifty hit 8271.05 on Wednesday, a near eight- month high. At these levels, the benchmark has now gained 2.9% — in dollar terms — so far in 2016.
With China under-performing but Russia faring exceptionally well with 26.4%, India has been a bit of a middler this year.
Most global benchmark indices have been average performers too, including the Dow, which has put on 2.9%. The FTSE100 has lost ground as Eurostoxx.
Brazil, of course, has walked away with the honours, with returns of a mouth-watering 33.6%.
At current levels, the Nifty trades at close to 18.3 times FY17 estimated earnings and 15.2 times estimated FY18 earnings.
However, as Kotak Institutional Equities point out, for the market to go up 10% by end-FY2017–a reasonable expectation– it would need to trade at around 17X FY2018 estimated earnings. “That is possible but the market has rarely traded at those levels for long,” the brokerage observed in a report on Wednesday.
As market watchers have pointed out the markets have rallied on the back of some policy reforms—the Bankruptcy Code for instance—prospects of a good monsoon and better than expected corporate earnings for Q4FY16. Some high-frequency data has been encouraging such as sales of cement and commercial vehicles.
Although chances of more policy reforms are bright —the GST could become a reality– , India, right now appears a tad expensive. Bloomberg data show other peer markets like Indonesia and Taiwan are currently trading at multiples of 14.6 and 13.4, one -year forward estimated earnings, respectively. China, on the other hand, is trading 12.6 times.
As KIE points out, “on a bottom-up basis, either every stock would have to be 10% higher, which means some of favored stocks would have to trade at even higher multiples or some of the laggards would have to rise significantly”.
Moreover, a host of fund managers is ‘overweight’.In May, Morgan Stanley upgraded India within emerging markets (EMs) from ‘equal-weight’ to ‘overweight’.
Foreign investors have invested over $2.6 million in Indian equities in 2016, less than they have in Taiwan, Russia and South Korea which have seen anywhere between $3 billion to $5 billion move in.
Citigroup expects the Sensex to hit 27,000 by December 2016 on improving macro economics and signs of a bottoming in a few sectors. According to Axis Capital, earnings stabilising but the price-earnings multiple is at risk. “Given the nature of our index, a Sensex EPS growth of around 15% per annum, over two years is achievable. “
Auto stocks including Tata Motors, Hero MotoCorp and Mahindra & Mahindra have been among the best performers on the Sensex contributing to 663.4 points of the total index’s gain of 903 points in the year so far.