The media today (i.e., 28th September 2010) has reported that the foreign fund inflows into Indian equities have increased 49 percent this year. This is making Indian equities to reach the skies. This liquidity driven momentum, as against fundamental factors which are not necessarily very positive, makes one a bit worried at this point of time.
The BSE Sensex has become the most expensive in Asia and also amongst the BRIC markets. BSE Sensex Price to Earnings multiples are nearly 20, while Hang Seng is trading at 14 and Shanghai at 18 times. Brazil markets are trading at 15 times their earnings and Russian RTS $ index is trading at 9 times the earnings. In comparison, Dow is trading at 14 times, S&P 500 at 15 times and FTSE at 16 times. The rise in BSE Index since the beginning of this year is nearly 15%, as against 2% of Hang-Seng, (-) and 20% of Shanghai. During the same period, Dow went up by 4% and FTSE by 3%.
Overseas funds bought a net 1340 crore rupees of Indian equities on September 24, taking total investments in the Indian stocks this year to 82,160 crore rupees, as per SEBI. This is almost equivalent to the record inflows of 83,420 crore rupees in 2009.
There are many worrying signs. One report in Wall Street Journal states that Indian banking sector has entered a high risk phase by lending to realty companies. The Common Wealth Games fiasco has exposed the country’s soft underbelly i.e., the acute infrastructure problems that lead to huge amounts of losses in productivity (estimated at 2% of GDP). The current account deficits are at the highest in the last 50 years. On the other hand, we are seeing good growth in Indian GDP. We have also seen reports that some of India’s leading FMCG companies are investing over 1800 core rupees in the coming months to expand capacity. IT Companies are looking to do good business in the coming months. Auto sales are booming.
In conclusion, while one can reasonably say Indian equity market will continue to see growth over a longer term horizon, a correction in near term is likely. I will continue to remain invested but would put my money in SIPs on index funds.