Financial Daily from THE HINDU group of publications
Friday, May 05, 2006
Financial Daily from THE HINDU group of publications Friday, May 05, 2006 |
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Markets - Stocks Our Bureau
Mumbai , May 4 Leading overseas brokerage JP Morgan has downgraded India to `underweight' from `neutral' in both emerging markets and Asia Pacific ex-Japan context, saying the combination of elections, fuel price increases and higher interest rates will limit returns from the Indian stock markets. In its report, titled `Bharat PE Achieved', JP Morgan Securities (Asia Pacific) Ltd said India was trading at 18.9 times forward earnings, a premium to the US, emerging markets and Asian markets ex-Japan and asked investors to switch to other emerging markets. "Investors should switch into China, Russia, Taiwan, South Africa within emerging markets, and China, Singapore and Taiwan within Asia-Pacific ex-Japan mandates," it said.
High valuation
High stock market valuation in India is a major reason for the downgrade. "India is the most expensive market in Asia ex-Japan based on either 12-month forward PE or dividend yield... India's expensive equity valuations make this market relatively more at risk in an emerging market sell off," it cautioned. JP Morgan's downgrade comes after similar concerns by leading brokerages Citigroup and Morgan Stanley. The downgrade "is a tactical call against an expectation of positive returns for emerging and Asian markets," the report said. JP Morgan's year-end Sensex target continues to be 11,000 and does not see major correction in the markets. "The risk of a significant correction in the Indian market is low. However, a number of macro-economic indicators are deteriorating; current account deficit, inflation and monetary conditions," the report said, adding that the Indian market has already achieved a meaningful premium valuation to the regional index and the US market.
Premium drivers
Some of the drivers of this premium include the declining relative risk-free rate with the US. "As Asian savers start to price in currency risk they demand a premium yield in offshore investments including US dollars. The result is that Asian yield curves are likely to be structurally lower than the US yield curve for countries with current account surpluses. This is unlikely to happen in India due to the large current account deficit," JP Morgan said. The other India-specific risks cited by JP Morgan include rapid rise in property prices in Mumbai and Delhi, delayed margin shock due to higher labour, interest rate and energy costs, lower agricultural output due to poor monsoon and political instability.
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