Indias outperformance of other emerging markets is at previous peaks and such periods are usually followed by the country’s underperformance, Jefferies has said in a report.
While India is viewed to be a beneficiary of the China turmoil, India’s Nifty has already outperformed emerging markets benchmarks by 19-33ppts on 3/6/12m basis.
From such levels, Nifty performance has been weak historically. Also, over the last 6 months, India has received only $1.5 billion of net inflow from foreigners despite the China problems. We see rising equity supply & peak valuations as risks, Jefferies said.
Nifty has outperformed the EM benchmarks by 19ppt/22ppt/33ppt on a 90 day/180 day/365 day basis. Our long term daily rolling analysis suggests that such periods of outperformance are unlikely to significantly extend beyond the current levels, Jefferies said.
Also, such periods of outperformance, are usually followed by India underperforming by 11ppt, 6ppt and 7ppt on average in the following 90, 180 and 365 days respectively.
“While we stay positive on India’s economic activity going ahead, we believe that valuations do not leave much room for upside. Firstly, Our favoured (Bond yld – Erngs yield) indicator highlights that the risk reward is unfavourable Secondly, we believe (link) equity supply could be 1.5x the 1HFY22 level in the 2H, which could cap the near-term upside, particularly if FPI flows were not to substantially pick-up. Thirdly, brisk economic recovery in India might prompt the RBI to slow down the liquidity support impacting equity market sentiments,” Jefferies said.
Nifty’s valuation on PE/PB basis are near/above pre-global financial crisis (GFC) peaks. Moreover, its outperformance has brought its PE/PB premium to EM benchmarks much above the historic averages. We note that while the problems in China have been going on for several months, India hasn’t seen much foreign inflows since March, Jefferies said.
(Sanjeev Sharma can be reached at Sanjeev.firstname.lastname@example.org)