Indian equities more expensive than emerging market peers: RBI's FSR report

Emerging markets’ (EMs’) equities look attractive from a valuation perspective relative to those of developed markets despite the wedge in earnings per share between the two groups, according to the FSR.
 
That said, the valuation of Indian equities vis-à-vis its EM peers seems to be somewhat expensive. The high valuations of the benchmark indices will be sustainable only if there is a steady rise in corporate earnings, the report observes.
 
The quarterly earnings per share growth of the S&P BSE 500 Index went up in the quarter ended September 2019 on a y-o-y basis, although the same for the Nifty 50 scrips declined. Further, future earnings expectations also witnessed a decreasing trend over the six-month period,” said the report.
 
According to experts, the gap between underlying corporate earnings and share prices has widened to a multi-year high.
 
The Sensex, for instance, may end the year at a price-earnings (P/E) multiple of 29x, the highest in 25 years.

 
Also, this is the third time in the past five years when index stocks together reported a y-o-y decline in earnings. Index companies had reported earnings contraction in CY15 and CY16, followed by a recovery in CY17 and CY18.
 
Unlike the trend observed in 2018-19, foreign portfolio investors (FPIs) invested $7.8 billion in the Indian securities market during April-October 2019, the FSR report noted. The first two quarters of FY20 saw inflows in the debt and hybrid segments as well. FPI investments in hybrid instruments saw a sharp increase during the current year with inflows of $744 million up to end-October 2019. However, FPIs offloaded equities worth $3.2 billion in the second quarter of FY20.
 
“As US monetary easing takes a breather, the exchange rate outlook for EM currencies will be a large determinant of EM local currency bond flows notwithstanding a generally favourable local currency interest rate environment,” the FSR observes.
 
Among BRICS nations (except China), India was the only country to see FPI inflows in both the equity and debt segments during the January-September period while Russia saw the highest liquidation by FPIs in the debt segment during the same period, the report observed.