India remains one of the cheapest stock markets

ToI 18/6/09

Chennai: After a walloping 77% rally in BSE sensex from March, the 30-share benchmark has recently shed around 1,000 points on the back of concerns largely focused on its valuation. But an analysis of 20 major global benchmarks shows that India (represented by sensex) is still one of the cheapest stock markets in the world.

Informed investors who look at potential value and simultaneously take into account the high growth rates would find India more attractive than European markets, Japan and even emerging markets including China, Malaysia, South Africa and Taiwan. No wonder, FIIs are yet to resort to any major sell-off and remain net buyers of stocks of nearly $1.4 billion in June.

Turning to peer market valuations, in isolation P/E (Price to Earnings) ratio for India could appear relatively expensive on a global perspective for investments but on adjusting for high growth (as in most Asian countries), the PEG (Price/Earnings To Growth) ratio determines a more accurate value while taking into account earnings growth. A lower ratio indicates more value remaining for investors.

Based on 2010 consensus estimates, India has PEG of 0.8, which is lower than China’s 1.5 (Shanghai SE A Share), Hong Kong’s 0.9 (Hang Seng), Indonesia’s 1.6 (Jakarta Composite), Malaysia’s 1.2 (Kuala Lumpur Composite), Singapore’s 1.15 (Strait Times) and even Taiwan’s 1.1 (Taiex), Bloomberg data shows.

“In a shrinking global economy, India’s contribution, given that the economy is still growing at between 5.8% and 7%, to incremental growth in world GDP will be too significant to be ignored. This is also likely to fuel investment into the country,” said Saibal Ghosh, chief investment officer of Aegon Religare Life Insurance.

India is also cheaper than Australia’s 5.6 (All Ordinaries), Spain’s 2.2 (IBEX 35), United Kingdom’s 1.8 (FTSE), France’s 1.3 (CAC 40) and South Africa’s 1.2 (JSE).

“Simply put India is in a superior risk and growth category relative to its past and peers. This should put India’s P/E ratios at a higher level relative to past market recovery cycles and other competing investment destinations,” said Subhajit Gupta, head (Research) of Reliance Equities.

After the US’ Dow Jones, only Brazil’s Bovespa and Russia’s RTS Index (dollar-denominated) are major countries which sport lower values than sensex. Foreign investors also feel that Russia’s governance issues may diminish its power to attract investments.

“Governance issues are jeopardising medium-term prospects. It could take time before Russia can again count on the high oil receipts and capital inflows of the recent past,” said an economist with Credit Agricole’s Economic Research.

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