Sensex leads the pack

A strong rupee, a reasonably resilient economy and improved corporate earnings are some of the factors that have helped the Indian stock market outperform other global markets.
Closely pegged to global trends. Rajalakshmi Sivam

Just as it did in the previous bull market, Indian stocks have outperformed most global peers in the recent stock market rally. While the Sensex gained 114 per cent from its March low, China's Shanghai Composite (up 47 per cent), Brazil's Bovespa (92 per cent), Taiwan's Taiex and South Korea's KOSPI indices haven't managed to match Sensex's return. MSCI Barra's World index reported a 74 per cent gain in this period. Developed markets have underperformed too, with the US bellwether Dow Jones Industrial up only 66 per cent.
Multiple factors have driven India's outperformance of other global markets: A strong rupee which made investments more lucrative for foreign investors, a reasonably resilient Indian economy and an improved earnings report from corporates.
Support factors
In the three quarters between March and December 2009, India Inc.'s earnings numbers have seen a sharp recovery. While the stimulus measures of the Government helped demand revive and supported sales; profits rose at a higher rate due to lower interest and input costs.
Every quarter, sequentially from March 2009, CNX 500 companies reported a double digit growth in PAT, at 20 per cent and above.
In the December 2009 quarter, companies of the same basket reported a 37 per cent growth in PAT against a 27 per cent fall in the same period last year (first signs of an earnings slowdown came in December 2008 quarter).
This was underpinned by India's strong economic growth, with GDP growth averaging 6.6 per cent between the June-December quarters. Its counterparts in the BRIC — Brazil, Russia and China — showed a mixed picture, with only China doing better.
India's growth also came on a fairly large base, as the respective quarters of the previous year saw GDP growth averaging 9.7 per cent. Corporate and economic fundamentals apart, the rupee factor too has played no small role in attracting fund flows into Indian stocks.
Between March last year and end-March 2010, the rupee moved from 51.88 to 44.9; giving more in return to FIIs than domestic investors who invested in Indian equities in this period. Dollar-denominated Sensex returns for this period stand at 146 per cent.
In recent months, a renewed debt crisis has shaken the European economies and China's efforts to cool its overheated economy too have seen investor preference for the Indian market. Lower Chinese demand also creates uncertainties for the commodity price outlook, which curtailed the rally in commodity-reliant economies such as Brazil and Russia.
Where valuations stand

Indian stocks may have outperformed other markets for good reasons.
But where do valuations stand today, relative to other global markets? If one looks at data from Bloomberg, based on their own estimates on earnings, Indian valuations do seem justified by growth prospects. But there are no doubt other cheaper markets to invest in.
The Sensex is trading at a PE of 17.2 with its earnings projected to grow by 20 per cent in the next year. China's Shanghai Composite index is trading at a PE of 18.5, much closer to the expected earnings growth of 19 per cent. European markets, as reflected by CAC 40, DAX and FTSE, are all much cheaper. They trade in a PE band of 12.5-13.5 with earnings growth projection at around 20 per cent. The US Dow Jones' PE is at 14, a discount to India for a 16 per cent estimated earnings growth in the next year.
Though the earnings outlook for Indian companies appears to have a more solid foundation than for many of the others above, India's high relative valuations do call for caution on the part of investors.
The outperformance by Indian stocks in fact suggests not a ‘decoupling' from global markets, but a reiteration that it is a high beta market, that is closely pegged to global trends.
Remember the last bull market? Between January 2007 and January 2008, the MSCI India index was up 47 per cent; higher than both the MSCI EM (19 per cent) and MSCI BRIC index (32 per cent).
But as the credit crisis unfolded with Lehman Brothers going bust, India was at the bottom of the pile — leading the losers. Given the persisting high correlation between the Indian stock market and the other global ones, investors should keep in mind that Indian stocks will not be immune if the global stock markets launch into a fresh correction.