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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, May 12 (Reuters Breakingviews) - India's stock-market valuations look stretched - but sticky. The benchmark Nifty 50 index is one of the best-performing in the world this year. Enthusiasm about the country’s long-term outlook under Prime Minister Narendra Modi, and a renewed appetite for emerging-market assets, both help. The changing savings habits of ordinary Indians are also driving a structural shift.
The MSCI India index now trades on 17.7 times forward earnings, well above a ten-year average of 15.5 times, Eikon data shows. Some household names look even richer: Hindustan Unilever and Bharti Airtel are on about 43 and 46 times earnings, for example.
The market's premium valuation is striking given three consecutive years of worse-than-expected corporate earnings. A raft of weak indicators, from flagging sales of scooters and motorbikes to weak credit growth, also suggest the economy is expanding more slowly than the 7 percent rate that policymakers trumpet.
Yet valuations also reflect liquidity. And there is now plenty of domestic cash sloshing around. New Delhi's corruption crackdown has hit house prices and authorities keep trying to curb gold purchases, too. As a result, securities look more attractive: in April, for first time, more than $1 billion poured into balanced mutual funds, which channel money into both debt and equity. Inflows into domestic equity funds doubled year on year.
Deutsche Bank analysts note that increasing domestic inflows – which have outpaced foreign inflows since early 2014 - mean the MSCI India is now much less affected when foreigners sell – and that valuations are increasingly “Made in India”, borrowing from the “Make in India” slogan promoting the nation's attempt to boost manufacturing. Given the still-low penetration of mutual funds compared to insurance and deposit accounts, this trend looks set to continue.
Indians have piled in and out of investment products before. They were aggressively sold high-fee products before the global financial crisis and subsequently suffered big losses. A brutal market bust is less likely this time, because people are increasingly buying through monthly "systematic investment plans". Investors held their nerve through Modi’s recent currency experiment, and could also look past likely disruption in the rollout of a new national tax. That suggests, even if the short-term fundamentals don’t quite stack up, gravity-defying valuations may be here to stay.
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- India's Nifty 50 index has risen more than 15 percent in the year to date, making it the best-performing major Asian benchmark outside the Philippines. On May 11 it closed at a record high of 9,422.
- The index is trading at almost 18 times forward earnings, compared to a ten-year average of 15.5 times, Eikon data shows.
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Editing by Quentin Webb and Nicolle Liu