Do you know that India has been one of the two worst performing equity markets of the world this year? The Indian benchmark index Sensex has plunged 16 per cent year-to-date. The US benchmark index Dow Jones, despite all the recent troubles, is just 1.5 per cent down for the year even after last Friday's free fall.

Peers in the emerging market space — China's Shanghai Composite (down 7 per cent), South Korea's KOSPI (down 5 per cent) and Taiwan's Taiex (down 13 per cent) — have all fared better than India. In the European markets, CAC 40, DAX and FTSE 100 have on an average lost 9-11 per cent in this period.

So, does this mean that the Indian market may look up from here?

May be, not. Despite sharp price corrections, Indian equities continue to enjoy a premium valuation over most other markets. Not only this, our earnings projections don't look too rosy either.

Today, the Sensex trades at a PE multiple of 15.6 times current year earnings with FY12 profits projected (by Bloomberg estimates) to grow by 10.7 per cent. This is, however, at a significant premium to most other markets including Shanghai Composite (at 14.5 times for earnings growth of 23 per cent for FY 12) and KOSPI (at 12 times for earnings growth of 41 per cent). FTSE 100, CAC 40 and DAX trade in a PE band of 9-10 times with earnings projected to grow at 18-20 per cent in the current year.

FII sell-off

Foreign institutional investors have pulled out Rs 8,067 crore till date from Indian stocks, after pumping in Rs 61,700 crore in 2010. There could be many reasons for this: One, global debt worries may be prompting them to move funds to safe havens such as treasuries, money market funds and gold. Two, they are re-shuffling their portfolio within the emerging markets as they find Indian equities pricey.

With S&P downgrading the credit rating of the US on Friday, foreign investors will re-shuffle their portfolio and some amount of funds may come back to India, says Mr Dipen Shah, Senior Vice-President-Research, Kotak Securities. If rupee appreciates in the coming week, that will make Indian equities attractive to foreign investors, he feels.

Slowing earnings growth

With interest rates heading up, India has its share of earnings worries too. Following a 27 per cent growth in profits in the December-2010 quarter, the Sensex companies reported 8.3 per cent increase in profits in the March-11 quarter. June quarter numbers of heavyweights such as Bharti Airtel, DLF and Sterlite Industries, have not been very encouraging either.

Related Topics
comment COMMENT NOW