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Indian equity markets fare best among key global peers

LiveMint logoLiveMint 08-06-2014 Ami Shah

Mumbai: Indian equities are among the best-performing global markets this year, as foreign investments in Indian shares outpace money going into competing emerging markets.

The 30-share S&P BSE Sensex has gained 20% this year, which is more than double its 9% gain in the whole of last year. It recorded a new high of 25,419.14 points on 6 June, improving on its score of 16 May, when general election results were announced. The Bharatiya Janata Party (BJP) won a landslide victory in the general election, becoming the first non-Congress party to secure a majority on its own.

In comparison, other BRIC (Brazil, Russia, India and China) peers have fared poorly. While Brazil’s Bovespa Index rose a bare 3% in 2014, China’s Shanghai Composite Index and Russia’s RTS Index have declined 6.1% and 4.1%, respectively.

At $1.5 trillion, India now ranks tenth in the world in terms of market capitalization. It has moved up two ranks from the end of 2013, outpacing peers South Korea and Australia. At this level, India’s market capitalization is more than double that of Russia, but less than half of China’s.

Even among a group of countries with high current account deficits, which Morgan Stanley last year called the “Fragile Five”, Indian equities have shined. All other countries within this grouping have seen returns less than India’s, with Turkey’s Borsa Istanbul Stock Exchange National 100 Index rising 16.1%, South Africa’s FTSE/JSE Africa Top 40 Tradeable Index 8.5% and Indonesia’s Jakarta Stock Exchange Composite Index rising 15.5%.

However, India has lagged behind markets such as Dubai, Argentina, Ukraine and Qatar.

“There is a certain degree of positivity emanating from the new government’s stance on reforms. The sense people are getting is this man (Prime Minister Narendra Modi) means business, and is here to deliver,” said Rakesh Rawal, head of private wealth management at brokerage firm Anand Rathi Financial Services Ltd.

Foreign institutional investors (FIIs), who drive Indian equities, have bought a net $8.3 billion of Indian shares this year, after investing a net $20 billion last year. In contrast, Brazil saw inflows of $5 billion, Indonesia $3.7 billion, South Africa $1.9 billion and Turkey $1.1 billion, according to data compiled by Bloomberg.

To be sure, funds that invest broadly in emerging markets have been seeing inflows. An increase in allocations towards India and Indonesia have led to these markets receiving a bigger proportion of investor money.

On Friday, Kotak Institutional Equities said funds benchmarked to the MSCI EM (emerging market) Index continued to see inflows in May, with $2.5 billion investments during the month. Over the past 12 weeks, $7.4 billion has flowed into such funds.

On 5 June, Credit Suisse Group said that India has climbed five ranks to reach the third place in its HOLT APAC Country Ranking Model. The model revolves around monthly bottom-up index ranking of the MSCI Asia Pacific countries based on valuations, market sentiment and cash flows. Credit Suisse credited the jump, the first since 2009, to the “euphoria” around Modi winning the largest electoral mandate in 30 years. “Sentiment is clearly improving in India, most notably in the autos and transportation sectors,” it added.

Sam Mahtani, director of emerging market equities at F&C Asset Management Plc, said Indian equities have been the biggest overweight in the fund’s portfolio for around 18 months now. F&C has $4 billion in its emerging markets and Asia portfolio.

“Elections have been a game-changing event for India. Even if the new government delivers half of its mandate, the market is going to reward them,” Mahtani said in a phone interview from London.

“Valuations of Indian equities for the next five years will be much higher than in the previous five years,” he said, adding F&C currently holds ICICI Bank Ltd, HDFC Bank Ltd, ITC Ltd, Tata Consultancy Services Ltd (TCS) and Tata Motors Ltd in its portfolio.

As per Bloomberg estimates, the Sensex currently trades at 16.1 times price-to-earnings (P/E) ratio, which is a 41.2% premium to the MSCI EM Index. At this level, the Sensex is trading marginally above its five-year average P/E of 15.9 times.

Mahtani, however, cautioned that there could be a correction in the mid-cap space since a number of low-quality stocks have run ahead of frontline stocks. The BSE Mid-cap Index and BSE Small-cap Index have risen 35.7% and 49.2%, respectively, in 2014.

Investors are also churning their portfolios in favour of cyclicals and moving away from export-focused stocks. The BSE Capital Goods Index and the Bankex are up 57.1% and 36.8%, respectively, this year, while the BSE Healthcare Index is up a mere 3.7%. BSE IT Index is the only index to post losses for the year to date, with a 7.5% decline.

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