Stock market set to end year with $10 bn inflow

Net FII inflow of $9.3 billion till 13 Dec.

After the tremendous response to the ICICI Bank issue from qualified institutional investors, India should easily close 2005 with a net foreign fund inflow of $10 billion. On December 13, the net foreign institutional investor inflow stood at $9.3 billion.

ICICI Bank's Rs 5,000-crore domestic issue is likely to allot about Rs 1,500 crore (about $325 million) to FIIs. Besides, the $750-million India-dedicated fund from Merrill Lynch in Japan may want to do some Christmas shopping.

India's market capitalisation at $525 billion is now way ahead that of China and Taiwan. India is also one of the most expensive markets in the world. A study by a foreign brokerage noted that in terms of price/book (4.8 times calendar year 2005), India was the third-most expensive market, while in terms of price/earnings (21.1 times calendar year 2005) it was the most expensive, though it could be said that the returns on equity (RoE) were high.

Since there really have not been any significant earnings upgrades, the market has become even more expensive. At 9,200, the Sensex now trades at nearly 15.5 times the 2006-07 forward earnings and 3.1 times the P/B. But money continues to flow in.

Analysts point out that the earnings growth is clearly slowing down. The Sensex earnings growth in the second quarter of 2005-06 (free-float adjusted) has been 23 per cent, down from 31 per cent in the first quarter and still lower if exceptionals are adjusted for.

Even for a bigger sample of nearly 2,000 companies, operating profits have grown by just about 10 per cent compared with a growth of 13 per cent in the June quarter.

Besides, thanks to increases in the cost of raw material, operating margins have been under pressure with margins contracting on an average by 100-150 basis points.

Why then is money continuing to flow in ? The fact is that India will continue be one of the fastest growing economies for the next four or five years with the GDP expected to post a 7-8 per cent growth annually.

The second quarter GDP growth at 8 per cent, driven by a 9.2 per cent growth in manufacturing, has given a boost to the confidence of investors. Given this, foreign investors, whether private equity firms or pension funds, are not too concerned about near-term valuations.

The response to the ICICI Bank issue ( the applications reportedly totalled $10 billion) bears testimony to this. Investors believe that against the backdrop of a relatively benign world economic environment, the fundamental India story continues to be a good one and should remain this way for another five years.

With the large domestic market being driven increasingly by favourable demographics, the competitive advantages in both manufacturing and services, and availability of skill sets, are reassuring. Besides, the big universe of investible stocks makes India a very attractive investment destination.

The US ownership of Indian assets is still very small compared with the ownership in countries such as South Korea. This is slowly changing since even from these levels, returns are expected to be superior to those from other emerging markets. That is probably why countries like South Korea have seen outflows of foreign funds this year. 

ASIAN TIGERS: MARKET CAP
	Current*  ($ bn)	1-month % change	YTD % change	% of  world
Japan	4702	7.23	23.57	11.59
Hong Kong	1130	4.82	37.30	2.79
South Korea	665	9.60	60.50	1.64
India	525	8.44	36.34	1.30
Taiwan	478	3.46	0.37	1.18
China	314	1.10	-28.09	0.78
Malaysia	178	-0.56	-3.03	0.44
*On Dec 13