Indian stock market rally – will it continue?

By: Sourajit Aiyer

Indian stock market indices have hit record highs as election results are approaching. Has the rally run its course or is it likely to continue?

The fiscal year in India (FY2013-14: April 2013 to March 2014) started with challenges inherited from the previous year, and ended with expectations over the ongoing federal elections.

Indian stock market performance was quite spectacular. India’s benchmark BSE Sensex-30 index (Sensex) was up 19% for the fiscal year, with maximum gains coming during the second half of the year in the months of September, October and March – coinciding with months of high net inflows from foreign portfolio investors (called FIIs in India).

However, the Sensex gained only 8% in US dollar terms for this fiscal year, given that the Indian Rupee (INR) lost almost 10% against the US dollar on average during this year. On a relative basis, India outperformed leading Emerging Markets and Asia-Pacific benchmarks during this fiscal year.

It also outperformed the Frontier Markets index, albeit by a lower margin as compared to its differential with emerging markets. Conversely, an improving outlook in the Western economies saw the German, UK, US and Developed Markets benchmarks outperform India during the year.

Nevertheless, India outperformed all these geographies in the three months between Jan-Mar 2014, following news of stability on certain macro indicators, appreciation in the INR and expectations over the federal elections.

In terms of the broader market, the BSE midcap and small cap indices had lagged the large-cap index (Sensex) during the first half of the year. However, the second half saw them outperform the Sensex during both the Q3 and Q4 periods.

This was largely because the valuation gap between the large-caps and mid-caps widened during the year as investor interest was restricted only to a few large-cap stocks. In the process, fund managers started exploring midcap picks, especially in the IT and industrials spaces, leading to spreading of buying interest into that universe as well.

The price/earnings ratio (P/E) of the benchmark NSE Nifty has so far averaged 18.3 during the calendar year 2014. This is lower than its immediate five-year historical average of 19.7, during which the upper limit of the P/E ratio was about 25.

Similarly, the average price to book value (P/B) ratio has averaged 3.1 during the calendar year 2014, marginally lower than the five-year historical average of 3.3, during which the upper limit was about 4. So the market seems attractively valued from this point of view, although one has to keep in mind the sector variations and trends.

Benchmark Indices Performance as of March 2014 (in US dollars)

Emerging Markets Stock Indices

Source: Bloomberg

Quarter-on-quarter returns during the fiscal year for major BSE indices

Indian Stock Market Indices

Source: BSE


Nevertheless, the Indian markets underwent a volatile year. The Sensex saw severe month-on-month swings based on news flow and economic developments.

The volatility in the Sensex, as measured by annual standard deviation, had been on a declining trend since FY2008-09. The gap in the standard deviation between India’s Sensex and USA’s DJIA had also narrowed.

But the fiscal year 2013-14 saw the standard deviation in the Sensex spike up on a year-on-year basis.

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