Investors in India say the government’s first full budget must find a way to boost capital spending while exercising fiscal restraint, or a subsequent sell-off in debt and equities could destabilise the rupee, risking a return to levels seen in 2013.
Prime Minister Narendra Modi’s election victory nine months ago resulted in India becoming Asia’s second best performing stock market after China last year, despite lacklustre economic growth, as investors pinned hopes on sweeping reforms.
So far this year India is Asia’s third-best performing equity market and equity valuation multiples, indicating expected earnings growth are the second-highest in the region, although the economy is still struggling to gather momentum and Modi has yet to fulfill many election promises.
“Going by fundamentals, India is overvalued in equity markets,” said Ashish Vaidya, executive director and head of trading and asset liability management at DBS in Mumbai.
“Everyone expects the budget to kick-start the investment cycle, but that won’t happen overnight. The corporate sector is clearly slowing down, which is the biggest indicator of economic activity,” Mr Vaidya said adding that risk-adjusted returns are better in the United States than in India.
The average forward price to earnings ratio for 920 Indian stocks over the next year was 16.8 times, the second highest in emerging Asia as measured by Thomson Reuters StarMine Smart Estimates, which narrows predictions to top-rated analysts.
Foreign investors have poured in $8.21 billion into Indian stocks and debt since the start of the year. At that pace, they could beat a record $42.34 billion invested last year.
In the past 20 years, according to data collated by analysts at UBS, India’s index for top companies on the National Stock Exchange (Nifty) has outperformed emerging market peers four out of five times following a government’s maiden annual budget.
But this time, analysts warn markets have already priced in significant reforms.