A falling rupee and concerns around the tapering of the US Federal Reserves quantitative easing programme have dampened the performance of Indian equities in dollar terms compared to Asian and emerging market counterparts.
Indian benchmarks have underperformed their peers for most part of the year in dollar terms,but with the rupee hovering near its all-time low of 60.7 against the dollar and a possible slow-down in fund flows,India’s performance could worsen. So far in 2013,the Indian equity market has emerged as the third worst performing market in Asia in dollar terms.
In dollar terms,the 30-share Sensex is down 11% YTD compared to a gain of 5% in Jakarta composite and 4% in the Thai index. Even Taiwan’s Taiex has lost just about 0.9% in the period. South Korea’s Kospi and Chinas Shanghai composite are the worst performing markets in the year so far,down15% and 13%,respectively,in dollar terms.
In June,India’s relative performance has worsened despite the fact that FIIs have sold a moderate $1.8 billion worth of Indian shares compared to their $2-$5 billion of net exits in markets like Indonesia,Thailand,Taiwan and South Korea since June 11. This is because the Indian currency has fallen 6.5% in June,making the Indian currency among the worst performers this year.
As per Rajesh Cheruvu,CIO of RBS Private Banking,at about 10% of the $15 billion YTD purchases a fortnight ago,the outflow from India has been moderate. However,given that about 60% of the fund flows were directed through stable means like OFS and QIPs this year,the exits from secondary market may not be too significant, added Cheruvu.
The recent FII exits picked up pace after the US Fed said it may end its qunatitative easing programme by mid-2014. The day after the Fed’s statement,the Indian market recorded its biggest single-day fall since September 2011. Not surprisingly,almost two-thirds of the total monthly outflow for June has been seen in the last one week.
While the rupee depreciation has affected the Indian market’s performance in dollar terms,the valuation discount could bring back the interest of FIIs. Currently,the Sensex is trading at a one-year forward price to earnings multiple of 12.7,a 10% discount to its long-term average of about 14.
In a recent note,Morgan Stanley argues that the Indian market is below fair value. It highlights that even as the Indian market trades at a premium of 32% to MSCI emerging markets in terms of forward P/E,it is justified given that Indian companies have offered higher return on equity (RoE) even at cyclical troughs.
Experts also highlight that the outflow from India may not be as severe,given interest rates have peaked. As per Saumil Shah,MD & head of equity sales trading with BofAML,unlike many Asian counterparts,Indian debt market has a much lesser reliance on foreign portfolio flows and it is the only country in Asia with room to cut interest rates.