Record Valuations Raise Alarm in India’s Frenzied Stock Market

(Bloomberg) — Analysts are cautioning against the blistering rally in India’s stock market as the country braces for its biggest annual economic contraction on record.

Overly optimistic earnings estimates and a reduction in liquidity pose the biggest threats to the scorching pace of gains, strategists from Nomura Holdings Inc. to Union Asset Management Co. warned. The S&P BSE Sensex Index has risen for 10 straight weeks — its longest winning streak since 2009.





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Foreign investors show confidence, sending Indian stocks to new highs

The nation’s central bank governor warned earlier this week about the rally, citing the disconnect between the markets and the economy as well as expectations bad-loan ratios at lenders will almost double this year.

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To be sure, high-frequency indicators are showing signs of revival in the pandemic-battered economy. Foreign investors have also supported the rise, plowing in $23 billion into the nation’s stocks last year as they pulled money from all other major economies in Asia other than China.

“Sustainable demand is key, and extrapolating some of the recent growth trends may lead to disappointment,” as it comes on top of a low base, Saion Mukherjee, a Mumbai-based analyst at Nomura said. On top of that, another risk is “a rise in inflation, leading to lower liquidity support.”

Read: India’s GDP Set to Drop 7.7%, Biggest Contraction Since 1952

The Sensex is expected to remain flat over the next 12 months, according to consensus estimates compiled by Bloomberg. That’s despite predictions that per-share earnings will grow 39% and 17% for BSE 500 and Sensex members, respectively, in 2021.

Meanwhile, even as India’s consumer price rise cools, Vinay Paharia, chief investment officer at Union Asset Management, sees an improving global economy potentially driving up inflation and interest rates and diverting flows into bonds instead of stocks. India’s central bank has already taken its first step to unwind stimulus measures.

“If interest rates rise, that would be a big accident for equities first, then the long-duration bonds,” said Paharia.

Aside from inflation, any tightening of fiscal stimulus in the annual budget reading in February could also hurt sentiment even though the earnings outlook is robust, said Mahesh Patil, chief investment officer for equities at Aditya Birla Sun Life Asset Management Co.

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