The Indian stock market's mania for Narendra Modi has turned into moderation. A year after the prime minister's landslide election, expectations for a rapid economic revival under his government have failed to materialise. Weak corporate earnings and tax disputes have tempered enthusiasm. As investors adopt a wait-and-see approach, any further gains in the equity market look distant.
Investors probably had unrealistic expectations of Modi after he stormed to victory in May last year. The MSCI India Index rose 36 percent from the start of 2014 to its peak on March 3 this year. It's since fallen eight per cent. Even after the recent slump, the index is trading at a multiple of 16.9 times forward earnings, above above its ten-year average of 15.3 times, according to Datastream.
Corporate earnings have failed to keep pace with the inflated hopes. Consensus estimates for 2015 have shrunk by over five per cent in the last three months, according to HSBC. Though the backlog of stalled Indian investment projects has fallen, the bank reckons they are still equivalent to 6.8 per cent of GDP. Company balance sheets remain stressed, while state banks, clogged up with bad debts, are reluctant to lend. There's no sign that will change soon. Indian engineer Larsen & Toubro warned in February that a recovery in its domestic business was still up to one year away.
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Foreign investors who helped to drive the Indian rally now own a record 24 per cent of the country's equities according to CLSA, limiting the scope for further buying. Fund managers are unlikely to add to their holdings without greater evidence that things are actually improving. That suggests India's markets are set for a more sober second year under Modi.
