Investment strategists are cutting recommendations on India at a record pace after the country’s stocks surpassed China as the most expensive major emerging market for the first time since 2006.
The Bombay Stock Exchange (BSE) Sensitive Index is valued at 20 times estimated profits, higher than China for the first time since November 2006 and the second-most expensive among the 25 biggest markets after Japan, according to monthly data compiled by Bloomberg. Even after the Sensex sank 4 per cent last week, the most in almost three months, its stocks trade within 6.1 per cent of analysts’ average 12-month price estimates.
Rising valuations prompted analysts to cut “buy” ratings on Indian equities to a record low. Goldman Sachs Group Inc said the Reserve Bank of India (RBI) plans its first interest rate increase since 2006 this week to curb inflation. The last eight times wholesale price increases climbed above their long-term average, the Sensex posted average losses of 5.6 per cent, Bloomberg data show.
“There are better opportunities in other emerging markets,” said Roger Groebli, the Singapore-based head of financial market analysis at LGT Capital Management, part of a group that oversees about $84 billion. India “will be an underperformer for the first quarter,” he said.
Growth rebounds
The Sensex gauge fell 0.9 per cent to 16,715.34 as of 10:04 am in Mumbai. The gauge surged 117 per cent from its March low to a high on January 6, as growth in the fourth-largest emerging economy after China, Brazil and Russia accelerated. Gross domestic product grew 7.9 per cent in the three months through September, from 5.8 per cent at the beginning of 2009. India may expand 6.4 per cent in 2010, according to the Washington-based International Monetary Fund (IMF).
The rally pushed the Sensex’s valuation above China’s Shanghai Composite Index, which trades for 18 times analysts’ earnings estimates. Chinese valuations are falling, as faster growth adds pressure on policy makers to slow the rise in asset prices. The government reported last week that the economy expanded 10.7 per cent in the fourth quarter, the fastest pace since 2007.
Brazil’s Bovespa trades at 13 times earnings estimates and Russia’s Micex is valued at 9.2 times. Japan’s Nikkei-225 Stock Average has a ratio of 40, compared with 14 for the Standard & Poor’s 500 Index, Bloomberg data show.
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Tata Motors Ltd, maker of the world’s cheapest car, led the Sensex’s advance since March with a 470 per cent gain. The Mumbai-based company is valued at 27 times analysts’ earnings estimates, compared with 23 times for Shanghai-based SAIC Motor Corp, China’s largest carmaker.
Analysts cut ratings
Surging equity valuations prompted India stock analysts to drop their “buy” ratings to 49 per cent of total recommendations, the lowest level since Bloomberg began tracking the data in 1997 and down from 59 per cent a year ago.
The rise in price-to-earnings ratios may prompt companies to sell shares in stock offerings. Indian firms have plans to raise as much as $30 billion (Rs 1.38 lakh crore) while the government may sell about $10 billion of shares in state-controlled companies, according to Kotak Securities.
Indian stocks risk a “tactical correction” because investors have failed to price in the effect of rising interest rates and inflation, according to Goldman’s Hong Kong-based strategist, Timothy Moe.
Inflation surge
India’s wholesale-price index climbed 7.3 per cent in December, the fastest pace in more than a year. Central bank Governor Duvvuri Subbarao probably will raise the key reverse repurchase rate by 25 basis points to 3.5 per cent and the cash reserve ratio by 50 basis points to 5.5 per cent at the next policy announcement on January 29, Moe said in a January 15 research report.
Eleven of 15 economists surveyed by Bloomberg predict policy makers will keep the reverse repurchase rate unchanged. Subbarao said last week he aims to support the nation’s economic recovery without “compromising” on price stability. A basis point is a 0.01 percentage point.
Overseas investors sold a net $123.9 million of shares on January 21, as the government said food inflation stayed above 15 per cent for the ninth week. The report dragged down financial shares from Housing Development Finance Corp. to ICICI Bank, which are both based in Mumbai.