Image: Danish Siddiqui / Reuters
In an election year, the biggest risk to Indian equities could come not from the outcome of the polls but from a deteriorating macroeconomic environment, rich valuations and a global backdrop that is increasingly vitiated by trade disputes and a return to protectionism.
Indian markets have spent the last four years at valuations that are well above their mean. The benchmark Sensex trades at 24 times (and about 18 times one year forward) earnings pricing in double digit earnings growth, which for the past four years has hovered between 4 percent and 5 percent a year. One reason for this has been the about ₹8,000-12,000 crore per month domestic equity inflows that have left the indices quoting at near their high point even as foreign investors have pulled out and corporate profitability has eroded in mainline sectors like banking and telecom. At 0.8x to GDP, India has among the highest emerging market capitalisation ratios.
In a recent report, brokerage Jefferies argues that even if profitability recovers, the market could have significant catch up to do. “We see few triggers (for) India’s equity markets this year despite our forecast of 31 percent aggregate EPS growth.” Investors should brace themselves for a messy election outcome that in the short term may impact valuations.
(This story appears in the 15 February, 2019 issue of Forbes India. To visit our Archives, click here.)