That’s despite little earnings recovery and FPIs having sold $3.4 bn in stocks in the last three months
Both the Sensex and the broader Nifty on Thursday soared to lifetime highs, leaving India the most most expensive market in the world. That’s despite the fact that corporate earnings are yet to show any meaningful recovery. The Sensex closed Thursday’s session at 33,147.13 points. The 50-share Nifty, which ended the session at 10,343.80 points, trades at a price-earnings multiple of nearly 22 times estimated earnings for FY18 and 17.4 times estimated earnings for FY2019, on a free-float basis. That’s a huge premium to historical valuations. Indian stock markets have rallied to new highs despite foreign portfolio investors having sold stocks worth $3.4 billion in the last three months, the bulk of it in August; their sales have been offset by purchases by domestic institutions to the tune of $7.1 billion. Indeed, local buying since January has hit nearly $11 billion whereas foreign funds have invested just half this amount.
Market strategists believe there is potential for disappointment in the markets given the rich valuations both on an absolute and relative basis. Kotak Institutional Equities has drawn attention to the macroeconomic headwinds given chances of modest deterioration in the current account deficit, the gross fiscal deficit and inflation and the continued challenges with domestic economic recovery. Moreover, it believes there’s a fair deal of earnings uncertainty as also risks to profitability across sectors. “Many sectors have historically high gross and Ebitda (earnings before interest, taxes, depreciation and amortisation) margins,” the brokerage pointed out. On Tuesday, the government announced a Rs 2.1-lakh-crore recap package for public sector banks, a move that is expected to spur lending and help kick-start the economy by strengthening the balance sheets of lenders.
Economists believe the bonds are a far better way to help rejuvenate the economy than a fiscal stimulus and that the multiplier impact of such a move will be far greater. A pick-up in bank lending, they believe, will help support the expected revival in the capex cycle. Analysts at Macquarie Capital opined that while the infusion of capital would would not alter the near-term earnings trajectory, it would likely further compress risk premiums. “The market would continue to ignore near-term earnings miss and discount stronger growth down the line. Markets would extend the rally with PSU banks being the clear winner while other cyclical sectors would also benefit from elevated expectations of turn in capex cycle,” they wrote.