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India Equity Research Reports, IPO and Stock News
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Unlike 2008, we think India could outperform regional markets from here, because of muted
foreign inflows, significant underperformance and potential improvement in domestic macro
data points.
Muted foreign inflows
One reason for the significant underperformance of Indian equities in 2008 (MSCI India
underperformed MSCI Asia ex Japan by 28% from 4 Jan 2008 through 26 December
2008) was a reversal in foreign institutional investor (FII) equity flows. Specifically, FII net
outflows totaled US$13.1bn in 2008, more than offsetting the US$12.8bn of inflows in the
second half of 2007. However, this time around FII inflows have only totaled US$2.2bn
for the first seven months of 2011.
The bulk of these ytd inflows have come in late June/early July (inflows of US$2.8bn for
23 June through 31 July). As such, there is the risk of reversal of these inflows, but the
magnitude should be a lot lesser than what we saw in 2008. Net FII outflows have totaled
US$220mn for the first four days of August.
Performance and valuations also more supportive
In addition to the significant flow reversal, the significant under-performance by Indian
equities in 2008 was linked to over-valuation and outperformance in the second half of
2007 – both these factors are significantly more supportive now.
MSCI India outperformed MSCI Asia ex Japan by 30% from 29 June 2007 through 4
January 2008. By comparison, MSCI India has under-performed the region by 12% ytd
through 4 August 2011.
MSCI India was trading at 12M forward P/E of 23.6x on 4 January 2008, a 53% premium
to Asia ex-Japan. By contrast, the current forward P/E is only 13.7x, a 22% premium to
Asia ex-Japan (roughly in line with the historical premium of around 18%).
Global developments could lead to an RBI pause
We are expecting another 25-50 basis points of policy rate hikes by the RBI. However,
the developing global economic slowdown and lower global commodity prices could lead
to a pause by the RBI in September, as growth could start dominating inflation as the
primary macroeconomic concern.
Reforms momentum could surprise vs. expectations.
Per media reports (refer “UPA seeks opposition’s help on reform legislation”, Mint, 5 August
2011), the Congress-led government is seeking the cooperation of the principal Bharatiya
Janata Party (BJP) to facilitate the passing of key reforms related legislation in the
parliament’s monsoon session. The BJP has also signaled a more constructive approach to
the monsoon session by focusing on debates and censure motions rather than disrupting the
parliament’s proceedings.
This increases the likelihood that reform legislation for the Pensions, Insurance and the
Goods & Services Tax (GST) can be passed in the monsoon session.
Staying bullish; continue to like rate sensitives
We maintain our bullish stance on Indian equity markets as we think a) valuations are
reasonable, b) there has been a tangible improvement in the government's policy inertia (e.g.,
appointment of chairman for the GST committee), and c) though the policy rate peak has
been pushed out, we are close to a peak in interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unlike 2008, we think India could outperform regional markets from here, because of muted
foreign inflows, significant underperformance and potential improvement in domestic macro
data points.
Muted foreign inflows
One reason for the significant underperformance of Indian equities in 2008 (MSCI India
underperformed MSCI Asia ex Japan by 28% from 4 Jan 2008 through 26 December
2008) was a reversal in foreign institutional investor (FII) equity flows. Specifically, FII net
outflows totaled US$13.1bn in 2008, more than offsetting the US$12.8bn of inflows in the
second half of 2007. However, this time around FII inflows have only totaled US$2.2bn
for the first seven months of 2011.
The bulk of these ytd inflows have come in late June/early July (inflows of US$2.8bn for
23 June through 31 July). As such, there is the risk of reversal of these inflows, but the
magnitude should be a lot lesser than what we saw in 2008. Net FII outflows have totaled
US$220mn for the first four days of August.
Performance and valuations also more supportive
In addition to the significant flow reversal, the significant under-performance by Indian
equities in 2008 was linked to over-valuation and outperformance in the second half of
2007 – both these factors are significantly more supportive now.
MSCI India outperformed MSCI Asia ex Japan by 30% from 29 June 2007 through 4
January 2008. By comparison, MSCI India has under-performed the region by 12% ytd
through 4 August 2011.
MSCI India was trading at 12M forward P/E of 23.6x on 4 January 2008, a 53% premium
to Asia ex-Japan. By contrast, the current forward P/E is only 13.7x, a 22% premium to
Asia ex-Japan (roughly in line with the historical premium of around 18%).
Global developments could lead to an RBI pause
We are expecting another 25-50 basis points of policy rate hikes by the RBI. However,
the developing global economic slowdown and lower global commodity prices could lead
to a pause by the RBI in September, as growth could start dominating inflation as the
primary macroeconomic concern.
Reforms momentum could surprise vs. expectations.
Per media reports (refer “UPA seeks opposition’s help on reform legislation”, Mint, 5 August
2011), the Congress-led government is seeking the cooperation of the principal Bharatiya
Janata Party (BJP) to facilitate the passing of key reforms related legislation in the
parliament’s monsoon session. The BJP has also signaled a more constructive approach to
the monsoon session by focusing on debates and censure motions rather than disrupting the
parliament’s proceedings.
This increases the likelihood that reform legislation for the Pensions, Insurance and the
Goods & Services Tax (GST) can be passed in the monsoon session.
Staying bullish; continue to like rate sensitives
We maintain our bullish stance on Indian equity markets as we think a) valuations are
reasonable, b) there has been a tangible improvement in the government's policy inertia (e.g.,
appointment of chairman for the GST committee), and c) though the policy rate peak has
been pushed out, we are close to a peak in interest rates.
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