Is India, the costliest market, likely to fall the most?

Forward earnings estimate show that Indian markets are priced higher than their counterparts and,so, have more room to fall

Global markets have finally woken up to the reality that China is the biggest threat to financial markets rather than Greece or interest rate hikes in the US. Despite a series of measures announced by the Chinese government to prop up the market, investors are in no mood to listen and are bolting for the exits. 

But what does this mean for Indian markets? According to a Bank of America Merrill Lynch report, Indian markets were among the few markets to give a positive return in the present calendar year. But this data is based on previous week’s closing. After a nearly 1,500 point fall on the BSE Sensex, India too have moved into the negative returns list.

What is more worrying than the negative list is that India is the costliest market among those in the MSCI index. India trades at 18.4 times (before today’s fall) 12-month forward earnings estimates as compared to 10.8 times for emerging markets. China is presently trading at only 9.3 times its forward earnings while the average developed world trades at 16.1 times led by the USA which trades at a valuation of 16.9 times its 12-month forward numbers.

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Does this mean that India has more room to fall as compared to others, and that we are just at the beginning of the fall? If one looks at the numbers, it does seem that India has the longest distance to travel to reach average valuations. Further if incremental money has to come in, it will go to cheaper markets rather than come to India.

But outflows suggest money is leaving from other countries at a faster pace than India. Emerging markets have seen heavy outflows from their equity markets in the past one week. At $8.3 billion outflow, emerging markets have seen the maximum outflow in the last 15 weeks. It has been seven straight weeks of selling resulting in an outflow of $26 billion. India has seen the lowest outflow in the last one week and is, besides Russia, the only developing market that has seen net inflows for the year.

If one looks with scepticism at the above data, then one can say that there is still a lot of money waiting to leave India. But on the other hand, bulls are of the view that India remains the preferred destination and more money is waiting to come in.

Atul Suri of Rare Enterprises said that he doesn't expect to see a global meltdown. The extent of fall in Dow and global indices will have a knock-down effect on India though India will relatively outperform, it will stand out among emerging markets and will be the first market to recover. India will benefit from big global commodity meltdown. Expect money to flow back to IT and pharmaceuticals, he said. 

Both the IT and pharmaceutical sector, which are dependent on exports and are beneficiaries of a weakening currency, are trading relatively stronger than the broader index. While the BSE Sensex trades nearly four percentage points lower, both healthcare and IT indices are trading around three per cent lower than their previous day’s close.

The present fall is mainly on account of global currency shakeouts. China in its bid to increase its exports and boost its economy is devaluing its currency on the other hand there are talks that the federal reserve may increase rates from September. Global realignment on account of China’s devaluation and fears of deflation is pulling down markets.

Viktor Shvets of Macquarie in an interview with CNBC said that the recent equity market bloodbath is in response to the deflationary environment prevailing globally. Deflationary pressures are rising globally. The only way to offset them is central bank generated liquidity. But if there is no global recovery, unless we have a significant shift in fiscal policy stance, it's going to get worse before it gets better.

As was the case following the 2008 meltdown, the current crisis will require co-ordinated efforts by all countries to come out of this mess. It will include India which will have to revive domestic economy rather than wait for the world to take corrective actions.