Foreign portfolio flows into the Indian equity market have crossed $19.5 billion in 2012 so far, and it looks like the year will see the second-highest inflows ever after 2010 when some $29 billion came in. Fund flows of this magnitude seem somewhat surprising, given the state of the economy—barely growing at 5.5%—and the widening fiscal and current account deficits. Moreover, capex has all but stalled, thanks to government inaction, and the corporate sector’s performance hasn’t been something to write home about. But fund managers of both GEM and Asia (ex-Japan) funds have been overweight India for a few months now and so we’ve seen a disproportionately high share of money moving in—India has pulled in more than half the $34 billion that has flowed into the top six Asian markets.
One big reason for this is that, globally, asset allocators have been in ‘risk on’ mode for the better part of the year given the abundance of liquidity flowing from accommodative monetary policy stances of most central banks. But if India is getting more flows than peer markets like Taiwan or Korea, it’s because the market is betting on an earnings recovery in the not so distant future. There are a few signs of that yet and, at an aggregate level, the quality of the September quarter numbers was undoubtedly poor, with profits being propped up by other incomes. However, a study by Citigroup showed that 43% of the companies that it tracks grew profits by 20%-plus. Moreover, in the past few quarters, the earnings surprises on the upside have been more than those on the downside and the good news is that the Sensex FY13 earnings forecast of around Rs 1,210 didn’t see a downgrade this season. So although management commentary remains cautious, it’s possible corporate profits are stabilising.
However, the process could take longer than the move in the market seems to suggest; after all, there’s little happening in terms of clarity on key policies. Indeed, a downgrade of FY14 earnings, currently estimated at R1,415, can’t be ruled out yet given that the global economy will take time to recover. Nonetheless, assuming no downgrades for the moment, at 18,842, the market trades at a shade under 14 times one-year forward earnings, below the historical average of 15 times. While a re-rating to a multiple of above 15 seems unlikely, a reversion to mean is quite possible, especially if the