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After Monday's 263-point fall in the Sensex, the naysayers will again question the sustainability of a rally in stocks. With Indian equities trading at a year forward price-to-earnings (P-E) ratio of 17.1 per cent, significantly higher than the 10-year average, some experts are questioning if a bubble has already formed.
There is no doubt that Indian markets have run up much ahead of anticipation. The reason is the market is willing to pay a premium for India’s potential growth, not only the present earnings growth.
Stock markets are like any other marketplace where investors pay for growth. There is no definite math to determine how much price investors should pay for present or potential growth.
Even as the rest of the world — some of the commodity-exporting emerging markets included — is struggling with low single-digit growth, India looks promising
Credit Suisse, like research arms of many other global investment banks, has come out with a report titled “2015 Outlook: Growth at any price?” on the outlook for next year.
Neelkanth Mishra and Ravi Shankar of Credit Suisse say: “With nearly three-fifths of the strong 2014 market performance in India coming from an increase in P-E multiples, questions on sustainability are justified. However, in a world struggling for growth (CY15 growth to be only marginally better than the anaemic CY14), India stands out. Promising medium-term prospects come from an extremely low base, and a stark improvement in state-level governance.”
The brokerage's India economists, C S economists, project the country to see the fastest nominal GDP growth in dollar terms in 2015, and the growth gap between India and the rest of the world expanding.
Given the widening differential in growth between India and the rest of the world, investors are likely to continue to pay a premium for growth and the market is not expensive yet, says Credit Suisse. Corproate India's earnings trajectory is also expected to see strongest growth with the least severe downward revisions.
Even among other emerging markets like Brazil, Russia and China, India stands out because of its remarkably low base. This will make India the fastest-growing economy in the world in 2015. However, Credit Suisse is recommending stocks with a strong earnings visibility, as the nature of growth in India has not changed meaningfully.
Credit Suisse's top picks are Gujarat Pipavav, Havell's, HCL Tech, HDFC Bank, Kajaria, Maruti, STFC and Sun Pharma. It's least preferred stocks are Bharti, BHEL, SBI and Tata Steel.
Credit Suisse TOP PICKS -- Gujarat Pipavav, Havell's, HCL Tech, HDFC Bank, Kajaria, Maruti, STFC and Sun Pharma
