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Betting on another decoupling

LiveMint logoLiveMint 13-05-2014 Krishna Merchant

The premium over valuation enjoyed by the Indian equity market (MSCI India index) over MSCI Emerging Markets index expanded sharply after the 2009 elections (see chart). So far in 2014, the expansion in price-to-earnings (P-E) multiples has been modest, although it has obviously increased in the last few days. Will we see a further expansion in the premium as after 2009?

While it is true that India’s P-E multiple widened relative to other emerging markets in 2009, the premium was low to begin with. For instance, on 18 May 2009, after the election results were declared, the premium was 21.7%. By the end of 2009, that premium over MSCI Emerging Markets index had increased to 26.5%. But here’s the rub: MSCI India’s premium to emerging markets was already 36.8% last Monday. The premium had started to fall, going up only in the past few days (see chart).

In short, investors are already valuing the Indian market much higher than other emerging markets. Some market analysts argue that markets like China, Russia and Brazil are all mired in their own problems and at least in India there is a hope of a bounce and of reforms. That view, they say, has led to a rotation of funds into India. As Citi Research pointed out in a recent note, India’s status has changed from hated to loved among investors and many who had stayed away from taking a political bet will now flock to Indian shores. India-dedicated funds have seen inflows and India’s weightage within the BRICs countries has increased. “Since the beginning of this year, there has been an incremental increase in India weightage on expectations of economic recovery and policy reforms. In 2009, hedge funds were short on India, ahead of elections; this time around the magnitude of hedge funds being short on India is small,” said Jitendra Sriram, head of research at HSBC Securities and Capital Markets (India) Pvt. Ltd.

To be sure, it is possible that given the high hopes from a Narendra Modi-led government, India’s premium to other emerging markets may continue to rise. It is important to realize, though, that the market is then betting on, as Hemindra Hazari, head of institutional equity research at Nirmal Bang Equities, said, “a decoupling of Indian equities from other emerging markets.” Only a structural change in the Indian economy can justify that.

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