India's Stocks Are Expensive But Still Beat Bonds, Goldman Says
India’s stocks, the most expensive in Asia, might still be a better bet than the country’s bonds.
(Bloomberg) -- India’s stocks, the most expensive in Asia, might still be a better bet than the country’s bonds heading into next year amid a forecast for earnings growth approaching 20 percent.
“The total return on equities will exceed that of bonds if bond yields rise moderately as we expect, given modest RBI tightening,” Timothy Moe, Goldman Sachs Group Inc.’s chief Asia Pacific regional equity strategist, said by email Nov. 28. “We got overweight on stocks over Indian bonds.”
Domestic funds and foreign investors have bought a record $24 billion of Indian stocks this year, heartened by reforms from Prime Minister Narendra Modi’s government, including the introduction of a nationwide goods and services tax. That’s propelled the S&P BSE Sensex to one of the best performances in Asia, made India the region’s most expensive market by price-to-earnings ratio, and prompted Moody’s Investors Service to raise the country’s sovereign rating this month to the highest since 1988.
“The next leg of the bull run will be driven by earnings growth, not by interest rates or valuations,” Moe said. The bank expects Indian companies’ profits to grow 18 percent in 2018, the fastest since 2010, helped by improving GDP growth and reduced impact of the goods and services tax and demonetization.
Sentiment toward Indian government bonds has soured recently as rising oil prices have stoked concerns about quicker inflation and dashed hopes for a rate cut. The Reserve Bank of India will keep the repurchase rate on hold through 2018, after cutting it to a seven-year low, according to most analysts in a Bloomberg survey.
It’s too early to celebrate victory on inflation, an RBI official told a gathering of money managers in Mumbai last month, according to two people present at the event who asked not to be identified as they aren’t authorized to speak on the matter publicly.
India’s 10-year bond yield has climbed about 62 basis points from its low in July as higher oil prices pushed the annual inflation pace to the highest in seven months in October. That damped speculation the RBI will be able to lower interest rates any time soon. The RBI kept benchmark rates unchanged at its meeting last month, while raising its inflation forecast for the October-March period.
The Sensex is trading at 22 times estimated earnings, near the highest level since 2010. “2018 will be a solid year for Indian stocks, but it won’t be as exceptional as 2017 as valuations remain very elevated,” Moe said.
To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net.
To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Joanna Ossinger, Todd White
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