India - The Third Most Expensive Emerging Market

Apr 17, 2017

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Stock markets should ideally reflect the state of the economy. But do they?

If GDP numbers are to be believed, India is the fastest growing large economy in the world. For the quarter ending December 2016, GDP grew by 7% compared to previous year. As Vivek Kaul suggests, this sounds too good to be true. Mind you, this was the period when we did a horrible experiment with demonetisation, bringing the economy to a screeching halt. Even now, there is little evidence of a broad-based revival in economic activity.

IIP numbers present a better picture instead. The index of industrial production (IIP) contracted by 1.2 per cent in February. All major segments such as manufacturing, capital goods, consumer durables and non-durables have contracted.

The country is facing many issues like rising bank NPAs, the farm loan waiver, weak sentiments and high inflation expectation among others.

Thus, the growth of 7% in the last quarter lacks conviction.

But the stock markets in India are shrugging this off. They have ignored all the negatives and continue to soar. In fact, Indian markets are hovering around all-time high.

Interestingly, as an article in Business Standard suggests, India is not an exception.

If we look at the price to earnings ratio for all the emerging nations, the valuation multiples have expanded way above their historical averages.

But let's focus on Indian stock markets here. On a price to earnings ratio comparison, the Sensex is placed third when it comes to most expensive emerging markets in the world.

What's driving this rally?

The global markets are up due to increase in capital inflows. For instance, FII flows into India since January totaled Rs 437 billion. This clearly shows the current buoyancy is a result of global liquidity i.e. flowing money into the emerging markets.

We believe, the current market valuations are not a reflection of reality. With economy struggling on many fronts, the valuations look unsustainable, unless there is an earnings recovery soon.

In short, one needs to be highly selective and focused on bottom up approach of picking stocks.

Data Source: Business Standard, Bloomberg

This Chart Of The Day was published in The 5 Minute WrapUp - The Stocks That Will Offer Value in the Small-Cap Space

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