Mumbai: Indian stocks have risen to new highs this fiscal year despite a series of developments perceived to be negative to the markets—the UK’s referendum to leave the European Union, Donald Trump’s victory in the US presidential election, the US Federal Reserve’s decision to hike interest rates and Prime Minister Narendra Modi’s demonetisation move.
India’s economic growth potential, the Bharatiya Janata Party’s (BJP) historic win in the Uttar Pradesh elections and a surge of liquidity towards risk assets took the Nifty to hit new highs in the last days of the fiscal year. Now, some analysts are predicting a further 12% rise by December 2017.
Middle of the pack
Notwithstanding the surge in 2017, in terms of 12-month returns, India is pretty much in the middle of the pack. Emerging market rivals such as Brazil and even some developed markets have yielded more than the Indian benchmarks.
Liquidity float
The rise in Indian stocks has been driven by funds from foreign institutional investors (FIIs). FIIs have bought local equities worth a net $6.45 billion this year. While that may pale in comparison with some of the previous years’ flows, note that this money has come in despite the negatives mentioned earlier.
Primary beat
The exuberance in the secondary markets rubbed off on the primary markets as well. This fiscal year, Rs34,705.21 crore was raised through new share sales, follow-on public offers, sales to qualified institutional buyers and rights issues.
Expensive valuations
The rise in stock prices, however, has not been accompanied by a concomitant rise in corporate earnings expectations. Indeed, any earnings growth recovery is at least a couple of quarters away as analysts continue to trim their forecasts. Valuations are rich, with MSCI India trading at a 60% premium to MSCI Emerging Markets.
Source: Prime Database, Bloomberg
