The Sensex could touch 100,000 in five years assuming a 15% EPS growth and a five-year average one-year forward PE multiple of 19.8x, according to Christopher Wood, global head of equity strategy at Jefferies.
The Sensex has traded sideways in the past year. This has allowed the earnings growth to catch up with valuations, said Wood. In this sense, India is not as expensive as it was, both in absolute terms and relative to the region. The one-year forward PE at 18x is only slightly above the 10-year average of 17.4x, while the Nifty PE premium to Asia ex-Japan at 42% is also near the 10-year average of 38%, he said.
With the structural story still intact, the Indian stock markets may continue to climb the proverbial wall of worry, according to Wood. Any change in the current consensus for the BJP’s re-election next year or a further reduction in retail investor activity following a period of range-bound market activity are the key risks for the next 12 months.
Positives include sustained inflows into domestic equity mutual funds, most of them via systematic investment plans (SIPs). Net inflows into domestic equity mutual funds totalled $20 billion in the past 12 months ended April. Equities, however, account for an estimated 4.7% of household assets of $11.1 trillion as of March-end.
Foreigners have of late returned as net buyers of Indian equities as they have retreated from China. After selling a net $4.5 billion of Indian equities in the three months to February, foreigners have bought a net $7 billion since March.
“Dedicated emerging market investors now appear only to be slightly overweight India, relative to history. One issue here is that India’s neutral weighting in the MSCI benchmarks has always been inappropriately low given the size of the economy. India still accounts for only 13.2% of the MSCI AC Asia Pacific ex-Japan Index,” said Wood.
Wood said the monetary tightening cycle may be all but over, with inflation falling in recent months. Headline and core CPI inflation have declined from 6.5% YoY and 6.1% YoY in January to 4.7% YoY and 5.2% YoY in April, while the Reserve Bank of India kept the repo rate unchanged at 6.5% in its last monetary policy meeting in April. The expectation is that inflation should run around 5% for the rest of this year, which is below the upper band of the RBI’s target, namely 6%, according to Wood.
Jefferies has had an average 40% exposure to India in the Asia ex-Japan long-only portfolio in recent years, with a bias towards Indian private sector banks. The Nifty Private Banks Index has risen by 1,073% in US dollar terms since the index began on April 1, 2005, while the MSCI AC World Banks Index is down 20% over the same period.
The past years also witnessed a dramatic de-leveraging of corporate balance sheets. The corporate debt-to-equity ratio for large listed companies is 0.6x, the lowest level since FY06.
Wood said there has been a massive surge in popular aspirations since Narendra Modi was elected as the prime minister in 2014. There has also been a related huge rise in India’s self-confidence as a country. He counts infrastructure upgrade, distribution of targeted welfare through technology and the success of the Unified Payments Interface as the key positives of the current government. He lists the near-completion of the two dedicated freight rail corridors as examples.
