India: Not cheap enough

Foreign investors may have started nibbling at Indian stocks: a Citigroup report says they turned net buyers in Indian stocks last week and that foreign net purchases in the Indian market have actually been the biggest since April 2008. Over the past four weeks, inflows have totalled $152 million with $52 million coming in during the last week.

Nevertheless, Citigroup believes that high valuations are still a concern. At 14678, the BSE Sensex trades at a price-earnings (P/E) multiple 15-16 times estimated FY09 earnings. That may be lower than the 17-18 times that the market was trading at earlier in the year.

However, given that the economic environment has deteriorated since then, the market is unlikely to be able to command a higher multiple in the near future. In fact, with the risk-free rate expected to rise further driven by higher inflation, there is a chance that the P/E could contract and reverse the trend only after the yields on the 10-year benchmark bond stop increasing.

It’s not hard to see why some FIIs may be shopping in India for select stocks —-after all India has been the second worst performing market in Asia since the start of 2008. However, if valuations turn cheaper, liquidity remains tight. Both global and global emerging market funds continue to see redemptions so Asian stocks are unlikely to rally significantly, even if Asian funds are buyers.

Interestingly, Indian domestic institutions have been sellers to the tune of Rs 823 crore in August . July was the tenth successive month in which mutual funds saw net inflows; but the amount of money that came in, at Rs 260 crore, was the smallest in nine months and 81 per cent lower than in June.

However, life insurance companies, which are now significant buyers of equities, have seen takers for their plans. New business sales growth for private sector players was up 80 per cent y-o-y in June, at around Rs 2600 crore, implying that the weak equity markets hadn’t put off investors.