This is wholly understandable. The bullish sentiment on Dalal Street at the start of 2024 is fervent. The ‘this time is different’ narrative is as strong as it can get with the Indian economy seemingly better placed than various regional peers, domestic political uncertainty waning, foreign investors pumping money into India, and retail investors upping their stakes in stocks, directly and through mutual funds.
So, is it really different this time? Like beauty, this depends on the beholder. Several domestic investors are going through one of the best phases in the stock market in recent years with manyfold returns. In their eyes, the bull run in Indian equities is still in its nascent stages and just starting to play out, given the growth prospects of the economy. With domestic-centric industries leading the upmove in the recent bull wave, investors have little reason to be pessimistic about India and park their money in overnight instruments. These market participants may have a reason to believe this time seems to be different.
For foreign investors investing in various global markets, the current situation may not be very different. While the overweight stance on Indian equities in recent times has worked well for their portfolios, there is a clear discomfort when it comes to valuations. The recent flood of foreign money into stocks here does not reflect this worry as most of these flows have been from hands-free passive funds driven by bullish momentum.
However, for many active fund managers, the growing variance in valuations between India and various other emerging markets has been somewhat unnerving. The Nifty is trading at an estimated price-to-earnings ratio of 20.2 times, a 27% premium to its 18-year average, according to CLSA. Even on a trailing basis, the Nifty’s PE ratio is at 25.1 times. CLSA said the PE ratio of 23-26 times has typically, over the past 18 years, signalled market tops. Similarly, India’s market capitalisation to GDP, popularly known as the Buffett indicator, is at over 120%, which is probably the highest since 2007-08, as against its long-term average of a little over 80%.
Despite these indicators flashing red, why is it that foreign fund managers are not rushing to exit Indian equities? It’s probably because the policy follies of other countries are making India look good.
According to Kotak Mutual Fund’s Nilesh Shah, India is still scoring goals, while other countries are hitting self-goals. “India’s premium valuation is as much its good work as others’ wrong policies.” Shah is referring to countries such as China, Russia and Brazil, where stocks are trading at far cheaper valuations but are struggling to inspire global investors’ confidence because of various concerns, including policy uncertainty.While investor aversion to these countries has benefited Indian equities in 2023, brokers said one of the key risks to the domestic stock market would be a shift of money from an expensive India to cheaper China or Russia. So far, global fund managers are still not convinced that Chinese stocks are worth the risk but as and when this narrative reverses, hot money could flow from Mumbai to Shanghai.
After the late rush in 2023, Indian stocks have left little room for disappointment. In an event-filled 2024, when seven of the world’s key economies including the US head for elections – the outcome of which could have a bearing on global political equations and commodity prices – a ‘one foot out of the door’ approach may be a strategy that investors could begin considering.
