Is India Overpriced?

Not at all! In fact it is still attractive by global standards…

A sharp 10% correction leaves a lot of optimistic investors in the lurch. Most investors like to believe that bull markets will last forever. The key questions are whether the 10% correction is a precursor to a larger correction? Is the correction indicative of a larger underlying problem? Is it just a temporary break in the rally, which offers an attractive entry point?

First, let us look at the flows…

Oh, yes the flows have been negative in the recent past. The last week saw foreign investors selling close to $750 billion worth of equities. But that was largely neutralized by the inflow of $770 billion from domestic institutions. So it is nothing like a mayhem sell-off we saw in 2008 or the currency driven sell-off we saw in 2013. Ok, let us say that 1 week may be too short a period and adopt a slightly longer perspective. In the first 4 months of 2015, India has been the highest recipient of FPI inflows among emerging markets; more than Taiwan and South Korea. If you look at the last 5 years (2010-2014), India has received inflows of $90 billion into equity. That is slightly more than the combined foreign flows for South Korea, Taiwan, Indonesia and Philippines.

Second, look at valuations…

It is natural for investors to be worried about steep valuations in India. The danger in using P/E as a proxy for valuations is that you miss the real story of growth. Let us begin by looking at forward P/E ratios. On the basis of projected 2016 consensus earnings, the Nifty quotes at around 12.9 times earnings. That makes it the cheapest among the emerging markets. The only other market with a lower P/E could be South Korea but their growth in profits is erratic anyways. In terms of P/B, India may look a little steep compared to other emerging markets. But that is more because of the overhang of funds raised in the previous decade. Don’t forget that over the next 2 years, Indian companies will show the best CAGR growth in profits. With an 8% GDP growth, Indian equities are still hot.

What should be your strategy?

In the light of the above investment case, investors should craft their strategy along 3 distinct lines. Firstly, focus on quality stocks that have corrected sharply. IT and pharma would fit the bill. For example TCS at Rs.2400/- is surely more compelling than TCS at 2900/-. Same with an Infosys or Lupin! Secondly, as markets go higher you need to become more selective. Be more cautious on mid-cap stocks and stocks with too much debt. They could implode any time. Lastly, keep an eye on liquidity. Tight money markets and Fed rate hikes can easily spook markets. Stay invested in equities but also stay vigilant. That is the crux of the message for investors! ©

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