Aberdeen cuts Indian holdings as Modi rally fizzles, rupee sags

India's stock market is swooning after a surge sparked by optimism over Prime Minister Narendra Modi's development agenda stretched valuations.

Aberdeen Asset Management is among those reducing Indian holdings in favour of cheaper regional markets, contributing to the S&P BSE Sensex index's three per cent drop this year after a 30 per cent jump in 2014. The rupee sagged as much as 1.1 per cent on Thursday to the weakest level since September 2013.

India's gauge is the only one down this year in the BRIC group after rallies in Brazil, Russia and China. The Sensex's valuation of 15 times projected 12-month earnings is about 20 per cent higher than the MSCI Emerging Markets index. That leaves companies such as Hindustan Unilever and Cipla with little room to undershoot profit growth expectations.

"The issue with India is the price," said Hugh Young, a managing director in Singapore for Aberdeen, which oversees about $537 billion. "India is still not cheap to other Asian markets. We have taken two per cent out of India in total."

A tax spat between foreign investors and the Indian government over past capital gains has also soured sentiment, embroiling Aberdeen and others in litigation.

The Sensex slid 0.4 per cent to 26,621.44 as of 1:44 pm in Mumbai, after falling 2.6 per cent on Wednesday to the lowest level since mid-December. The rupee dipped 0.9 per cent to 64.135 per dollar, weakening for a fifth session. Foreigners have been net sellers of Indian shares for the past eight trading days.

BRIC
The Brazilian, Chinese and Russian markets are among the world's best performers in 2015, even after declining recently. China's Shanghai Stock Exchange Composite index has jumped 27 per cent, Russia's Micex index is up 20 per cent and the Ibovespa Brasil Sao Paulo Stock Exchange index has climbed 14 per cent.

"There's a rotation story in emerging markets where investors are reducing the overweight positions and buying into other interesting stories," Adrian Mowat, the chief Asian and emerging-market equity strategist at JPMorgan Chase & Co, said on Bloomberg TV India.

Modi's steps since sweeping to office a year ago include a push to revive investment and manufacturing while curbing graft. The economy expanded 7.5 per cent in October through December from a year ago, though revisions are clouding the data. The premier has scrapped subsidies on diesel fuel and ended a 40-year-old state monopoly on mining and selling coal. A goods and services tax that may spur commerce is a also step closer after India's lower house cleared a related bill on Wednesday.

Policy delivery?
At the same time, Modi's vision of bullet trains and jam- free roads connecting gleaming Indian cities faces the difficulty of achieving infrastructure spending goals, as well as obstacles from a byzantine bureaucracy and tax code.

About $392 billion of infrastructure projects - more than the size of Thailand's economy - were stalled as of early March, government data show. That's tempering the initial euphoria about his economic-reform agenda. "People are starting to wonder will Modi be able to deliver," Templeton Emerging Markets Group Executive Chairman Mark Mobius said on Bloomberg Television in Hong Kong on Tuesday. "It'll be difficult to do so because of the embedded bureaucracy in India and the policies in the past that continue unless he takes strong, decisive action."

Still, strategists continue to expect the index to climb by December, forecasting a level of 32,640, up 22 per cent from the close on Wednesday.

Earnings
Earnings for Sensex companies are estimated to grow about 31 per cent in the financial year 2016. That compares with about 13 per cent for the MSCI Emerging Markets Index.

Aberdeen's Young said if some of the Indian stocks the company's funds continue to hold underperform "badly," they'd consider adding to those holdings. The money taken from India is going to other Asian nations, including China, he said.

The problem for the wider Indian market is that earnings expectations look overly rosy, said Anil Ahuja, the Singapore- based chief executive officer of IPEplus Advisors.

Expectations of as much as 18 per cent earnings growth in the year ending March 2016 are "highly questionable" given that profits rose about five per cent in the prior fiscal year, he said on Bloomberg TV India today.

The prospect of the Federal Reserve increasing U.S. interest rates in 2015 -- a move that BlackRock Inc. says threatens emerging markets -- may add to concerns about India's earnings outlook.

"The market will give the corporates another nine to 12 months," said Sam Le Cornu, who oversees about $3 billion in Asian equities at Macquarie Investment Management in Hong Kong. "If you're more short term, then maybe six months. The positive sentiment is still way ahead of the fundamentals."