Indian equities are overbought
Indian stock markets (INDA) are currently overbought. The MSCI India Index is nearly 46% more expensive than the MSCI Emerging Markets index. Currently, the MSCI India Index trades at a one-year forward price to earnings multiple of 17.8x compared to 12.2x for the MSCI Emerging Markets Index. In 2017 so far, the MSCI India Index has climbed 21.4%, outperforming the MSCI Emerging Markets Index which has surged 17% year to date.
The Indian market’s valuation premiums have hit a 15-month high with investors betting on tax reforms in the country. Experts believe these stretched valuations call for caution for investors in Indian markets as earnings estimates for Indian stocks have declined over the past 3-6 months. Over the long term, however, they are upbeat on Indian stocks given a stable political climate, favorable investment environment, and earnings recovery.
Stocks that are likely to make it to the MSCI India Index are Indian Oil Corporation (IOC), Federal Bank (FEDERALBNK), Rural Electrification Corporation (RECLTD) and Petronet LNG (PETRONET). However, Container Corp of India (CONCOR)and Divi’s Lab (DIVISLAB) could be removed while weights of ICICI Bank (IBN) and Grasim (GRASIM) is likely to be modified.
Presently, Grasim, Container Corp, and Federal Bank are trading at expensive valuations, while Rural Electrification Corp, Divi’s Labs, ICICI Bank, Indian Oil Corp and Petronet are trading inexpensively on a price to earnings basis.
Grasim, Container Corp, and Federal Bank are trading at PE ratios of 23.1x, 36.3x and 23.2x compared to a PE multiple of 22x for the broad-based Nifty Index. Rural Electrification Corp, Divi’s Labs, ICICI Bank, Indian Oil Corp and Petronet have PE multiples of 7.4x, 15.1x, 17.1x, 19.1x, 18.7x and 18.9x respectively.