Stocks pricey, but FII flows may take indices higher

Indian shares look expensive compared with other emerging markets, but higher allocations from global funds may propel key indices above their all-time highs, according to experts.

On Tuesday, the Bombay Stock Exchange (BSE) Sensex closed above 20,000 for the first time since January 15, 2008. The 30-stock index is now about 1,205 points, or six per cent, from its all-time high of 21,206.77 hit on January 10, 2008. The 50-stock Nifty closed above 6,000 for the first time since January 15, 2008.

According to a Credit Suisse report, the 12-month forward price-to-earnings (P/E) multiple of MSCI India is 16.9 times, the highest among comparable global emerging markets. However, the earnings per share (EPS) growth estimate for the MSCI India index for 2011 is also high at 22.1 per cent (see chart).

Experts say there is scope for a further increase in inflows from foreign institutional investors (FIIs). “We believe the potential for further fund inflows is significant as global funds are just beginning to increase their India allocations. Even global emerging market funds are barely neutral on India,” Manishi Raychaudhuri, head of equity research at BNP Paribas Securities (India), said in a note to clients. “If the current run rate of FII inflows continues, the Sensex could touch 15-20 per cent premium to our fair value estimate of 19,600 by December 2010,” he added. FIIs have net-bought Indian shares worth $16.5 billion this year so far.
 

FII FILLIP
	12-month  forward  P/E ratio	EPS   growth (%) FY10	FY11 estimated
Argentina	10.3	3.6	4.8
Brazil	9.8	24.8	23.4
China	12.3	25.9	16.9
India	16.9	23	22.1
Indonesia	14.3	20.4	21
South Korea	9.1	55.7	6.4
Malaysia	14.9	27.3	15.1
Russia	6	29.4	16.5
Taiwan	12.7	92.4	10.3
Hong Kong	9.4	27	4.4
Source: MSCI, Credit Suisse

According to BNP Paribas, global funds are underweight on India with 0.38 per cent weight for the country. In comparison, the weight in the MSCI World is 1.03 per cent. “Even if we assume no further inflows into global funds, just a reallocation to the neutral position could lead to $6.8 billion additional inflows. If this reallocation happens by the end of 2010, it could mean nearly $1.7 billion additional inflows per month till end-2010,” said Raychaudhuri.