Stock rally faces hurdles in India

Bloomberg

Another thousand-point milestone is within reach for India’s benchmark equity index.
Following the drubbing earlier this year, the S&P BSE Sensex is nearing the 39,000 level, the gauge’s third round-number mark since surpassing its life-time peak two months ago — a rally that’s helped the gauge cement the tag of Asia’s best performer this year.
While there’s optimism that economic growth topping 8 percent will help power equities higher in the coming months, lingering external risks, most notably from the price of oil — and its impact on the rupee — and stretched valuations is giving some investors a pause.
“Markets have run up a lot and there’s certainly an element of risk when this happens — it is never easy to buy in such times,” said Sunil Sharma, who oversees $1 billion of assets as chief investment officer at Sanctum Wealth Management Pvt. in Mumbai.
“There are short-term fears like oil prices that may lead to a correction, though the economy remains on a firm footing.”
Gross domestic product expanded 8.2 percent in the June quarter from a year earlier, the government said after market hours. That was faster than the 7.6 percent median estimate in a Bloomberg survey of 42 economists.
The Sensex trades at an estimated price-earnings ratio of about 21, the steepest among equity benchmarks in the region after New Zealand.
Despite the selloff in mid-cap stocks, the one-year forward PE ratio for the Nifty Midcap 100 Index is still at a premium to the Nifty gauge of India’s top 50 companies, signaling higher growth expectations for smaller firms are priced in, UBS Securities India Pvt. said in a report.
About three-fourths of 50 Nifty members reported results that either beat or met earnings estimates in the June quarter, the highest proportion in at least three quarters, according to calculations by Bloomberg Quint. The “upcycle could be quite significant, a contrast to most parts of the world” as the share of corporate profits in India’s GDP is close to all-time lows, according to Morgan Stanley. For now, the rally has outpaced the outlook for profit growth, with UBS saying consensus earnings for Nifty are likely to be cut 7-8 percent.