ET Intelligence Group: Considering the euphoria around the clear mandate to the National Democratic Front (NDA) in the general elections, market multiples are expected to expand as real economic growth may take some more time to improve.The Nifty 50 trades at 17.8 times its projected 12-month earnings, a 15 per cent premium to the 10-year average.
India has become the fourth best performing market in dollar terms with 10.3 per cent return over the past 12 months, after Indonesia, New Zealand and Bahrain.
Indias price-earnings multiple is one of the most expensive among the top 10 markets by market capitalisation.
It now commands a premium of 55 per cent over the MSCI Emerging Market index valuation compared with the 10-year average premium of 33 per cent.The inflows in the domestic mutual funds had dropped to Rs 4,229 crore in April, the lowest in 31 months.
However, there has been a pick-up in the flows from foreign funds, mainly from exchange-traded funds.
The stability of the government and continuation of policy means several long-only funds may raise allocation to India.Foreign portfolio investors (FPIs) have adjusted the weight of Indian equities in their portfolios to neutral in the past two months from underweight about six months ago.
In 2014, after Narendra Modi became prime minister, FPIs had turned overweight by as much as 550-600 basis points, the highest overweight in 15 years back then.
At that time, the price-earnings multiple was the key driver for the markets amid slow earnings growth.
Indias price-earnings (P/E) multiple had expanded to 16.8 by April 2015 compared with 14.8 in May 2014.The Nifty 50 earnings grew by 4.8 per cent annually in the past five years compared with 8.5 per cent growth in the five years before that.
According to Bloomberg consensus estimate, the Nifty 50 earnings will grow by 20 per cent and 18 per cent for 2019 and 2020, respectively.A sizeable proportion of earnings hinges on higher profits of the banking and finance companies given their one-third weight in the Nifty.