India stock prices stretched on Modi euphoria: Aberdeen

Says the world-beating 23% rally this year may have outpaced the outlook for corporate earnings

The world-beating 23 per cent rally in Indian equities this year may have outpaced the outlook for corporate earnings, according to Aberdeen Asset Management Plc.

"We are in the more sceptical camp," Hugh Young, a Singapore-based managing director at Aberdeen, which oversees about $537 billion, said in an interview on Bloomberg TV India on Thursday. "Things are too optimistic at the moment and prices are slightly ahead of fundamentals."

Global investors have bought $25.5 billion of domestic shares and bonds this year even as Prime Minister Narendra Modi has yet to deliver on his election pledges to revive economic growth and make India an easier place to do business after a landslide victory in May. Opposition lawmakers scuppered Modi's attempt to revive a bill raising foreign ownership in insurance companies, dealing a blow to his efforts to further open Asia's third-largest economy.

"There are a few queries about the new government, about whether it's active enough in the early days," Young said. "It's foolish to expect too much too soon but really we want to see a clear plan going ahead."

India's rupee has weakened 1.4 per cent against the dollar since the new government presented the budget on July 10, the worst performance in Asia. Brokerages including Motilal Oswal Securities Ltd and Ambit Capital Pvt expect Modi to offer policy details in his first Independence Day speech tomorrow.

"The key issue we would like to see is to be making life easier for investments and doing away with a lot of unnecessary paperwork involved in doing business in India," said Young.

Earnings scorecard

The S&P BSE Sensex, the best performer among the world's 10 biggest markets this year, trades at 15.3 projected 12-month profits, compared with the MSCI Emerging Markets Index's multiple of 11, data compiled by Bloomberg show. Thirteen of 28 companies on the Indian gauge that have posted earnings for the three months ended June have beaten or matched forecasts. That compares with 60 percent in the previous three months.

"Earnings till the end of June are relatively lackluster as the economy was sluggish during this period," said Young.

"The market needs to pause for earnings to catch up. There is money waiting to come in. The problem is that of price."

The government estimates economic expansion will quicken to 5.9 per cent in the year through March 2015 from 4.7 per cent in the previous period, according to the finance ministry. The $1.88 trillion economy expanded 4.5 per cent in 2012-2013, the slowest pace in a decade.