Why India Is The Most Expensive Asian Market

For index investors in Asia, India’s Sensex has been the best bet this year even as emerging markets face multiple headwinds.

The 30-share S&P BSE Sensex has returned 11.05 percent so far this year. While that may pale in comparison to the 28 percent surge in 2017, it has outperformed Asian peers. And that pushed the index’s 12-month forward price-to-earnings multiple to 19 times, making it the most expensive in the region.

While the broader markets lagged, the Sensex was in large part helped by domestic flows worth $10 billion (Rs 67,832 crore) into equity funds, according to Bloomberg. That’s in contrast with the selloff by foreign funds on a year-to-date basis.

The average global emerging markets fund allocation is currently at its lowest level since the early second quarter of 2015, according to a recent EPFR Global statement. Rising fuel prices, threat of a trade war between China and the U.S. and rising rates in the U.S. contributed to foreign investors pulling out of emerging markets this year. But India’s outperformance stems from the fact that it’s not the epicentre of trade tensions.

India is a very small part of the global supply chain, making the case of global money coming into the country in the event of a trade war, according to Bharat Iyer, head of India Equity Research at JP Morgan.

The financial crisis in Turkey poses another threat to other emerging markets. But India is expected to remain insulated. Neelkanth Mishra, director in charge of equity research at Credit Suisse, said concerns over the rupee have abated. Despite making the largest one-day move in more than a year, the Indian unit is only tracking the U.S. dollar, he wrote in a note. “We are unlikely to see meaningful weakness and volatility specific to the rupee.”

A steady improvement in corporate earnings also lends support with the other key Indian benchmark Nifty’s earnings per share expected to grow at an annualised rate of 23 percent in three years through March 2020, according to a report by Motilal Ostwal Securities.

The geopolitical environment currently within most countries is rough, leading to lack of inflows, according to Nilesh Shah of Envision Capital. India, however, seems to be on a stronger footing as the government has been perceived to be taking steps in the right direction to curb Inflation, tackle fiscal deficit challenges and revive the investment cycle, he said. Shah expects fund allocation to emerging markets to increase if the global market environment remains sanguine.

Vikas Khemani, president and chief executive officer at Edelweiss Securities, said a favorable consumption-driven demand and a pick-up in the investment cycle will also help. But concerns remain.

According to Khemani, India still faces an upside risk in the near term in the run-up to the next general election, and the possibility of further interest rate hikes by the RBI to keep the Inflation within their target range of 4 percent.