The insatiable appetite of foreign investors for Indian equities, which helped the markets scale multiple record highs over the last year, may turn out to be a limiting factor for the benchmark indices in the near term, reports Devangi Gandhi in Mumbai. The near 25%
rally in the benchmark indices has pushed up valuations to a five-year high with the relative value of MSCI India to MSCI Emerging Market Index rising to a new record.
Moreover, the consensus overweight rating on India has in itself raised concerns. Bank of America Merrill Lynch (BofAML) believes the market will be rangebound to negative over the next few months. It points out that a common refrain from companies is that nothing has really changed on the ground in the 10 months post the elections. “This highlights our near-term concern that the pace of economic recovery as well as earnings recovery will disappoint investors in near term,” BofAML noted in a recent report.
Even as India received more than its fair share of foreign portfolio investments in 2015 so far—at close to $6 billion — some of its emerging market peers, including China, Taiwan, South Korea, and Indonesia, have performed better in the first three months of the year. Given that most of these markets continue to trade at cheaper multiples compared to Sensex which currently commands a forward price to earnings multiple of 15.8 times, their out-performance is likely to continue.
Even the Shanghai Composite that has rallied more than 18% in the year so far, almost six times the gains recorded by the Indian market barometer, still trades at a forward multiple of 14.7 times.
CLSA recently wrote that the interest of foreign institutional investors in India is nearing a “short-term” peak due to heavy overweigh positions and lack of market triggers. While India continues to be a preferred long-term investment destination, concerns over the US Fed’s interest rate stance have triggered a pull-back in the market. These concerns could continue to weigh on the market in the near-term, especially as earnings are yet to recover.
Rashesh Shah, chairman & CEO of Edelweiss Group, says expectations of a rate hike by the US Federal Reserve are slowly getting built into the prices. He adds that the event will impact the Indian market because flows in the emerging funds could slow down and India has enjoyed the biggest allocation. “While the average allocation in the MSCI is 7-8%, most funds have allocated 20% to 25% towards India. We may see another three to six months of subdued movement because eventually earnings need to catch up with the expectations,”Shah observed.
While earnings for the October-December quarter earnings came in below expectations, the commentary from corporate India had a cautious tone, leading to several earnings downgrade. Bloomberg data shows, that the consensus Sensex EPS (earnings per share) estimates for fiscal 2015-16 came down from Rs 1,905 to Rs 1,788 in the last three months. The caution amongst investors has prompted brokerages like Macquarie and Ambit Capital to lower their Sensex targets for December 2015 and March 2016 to 31,600 and 34,000 from earlier marks of 33,000 and 36,000 respectively. Even as the Reserve Bank of India (RBI) has embarked on a much awaited cycle of interest rate cuts – the central bank reduced benchmark rates by 50 basis points in two surprise announcements since January – the banks are yet to trim their base rates which will effectively lower the cost of loans for borrowers.