India File: Exuberance and anxiety as equities rally on

HLV

24/09/2024 04:55

(India File is published every Tuesday. Think your friend or
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Sept 24 - By Ira Dugal, Editor Financial News, with global
Reuters staff

    Hello, I'm Ira Dugal and I head financial news for Reuters
in India. Join me each Tuesday as I lead you through the biggest
stories out of India, and Asia.
    Indian benchmark equity indexes, already ebullient, got
another burst of energy over the past week - hitting their 60th
record high of the year - after the U.S. Federal Reserve's
jumbo-sized interest rate cut. But investors are divided on
whether to cheer about the rally or fret about markets
overheating. That's the focus of our discussion this week.

THIS WEEK IN ASIA  
** China's central bank unveils broad easing measures to revive
economy
** Leaders of Australia, India, Japan and the United States
expanded joint security steps in Asia's trade-rich waters
** Bank of Japan signals it is in no rush to raise rates further
as it eyes global uncertainties
** Ammunition from India has found its way into Ukraine, raising
Russian ire

EXUBERANCE AND ANXIETY 
India's benchmark equity indexes – the NSE Nifty 50 and the S&P
BSE Sensex - have outperformed most major global markets so far
this year, surpassed only by the Nasdaq and S&P 500.
    The indexes tacked on a few more percent after the U.S.
Federal Reserve's 50 basis-point interest rate cut last week,
with the Nifty now up 19.3% and the Sensex up 17.5% for the year
to date.
    The outperformance has pushed up India's weighting in a key
Morgan Stanley equities index, overtaking China and kicking off
a virtuous cycle of increased flows, bigger gains and an even
higher weighting.
    "India will continue to gain share," Morgan Stanley analysts
wrote in a note last week. With India's nominal GDP growing at
three times the rate of China, they added, there is a "profound
divergence" in the earnings growth environments of the two giant
Asian economies.
        India's surging share prices have lifted valuations to
among the highest across major markets, with the 12-month
forward price-to-earnings ratio of the Sensex at 23.6 and the
Nifty at 24.4.
    Domestic institutional and retail buyers appear unfazed by
those lofty numbers, as they continue piling into equities.
    Domestic flows, averaging $7.5 billion per month from
January to August, are three times greater than the same period 
a year ago. An estimated one-quarter of India's personal
financial savings are now going into the stock markets,
Jefferies analysts said last week.
    "We believe that this is unsustainably high and it makes us
uncomfortable on the near-term equity outlook."
    Foreign investors have been cautious about buying at these
valuations but have been more open to investing in primary share
offerings, which are also rising and adding fuel to the equities
buying.
    Over the past week alone, three more large companies -
state-owned utility NTPC's green energy unit, Brookfield-backed
Hotel Leela and consumer financier HDB Financial - have
announced plans to go public.
    Some foreign companies, such as South Korea's Hyundai Motor,
have also been drawn to raising capital from the Indian markets.
 But an Indian listing could prove to be a honey trap for global
firms, Reuters Breakingviews columnist Una Galani wrote.
        Alongside the primary markets, trading in equity
derivatives has boomed in India, prompting repeated warnings
from the market regulator, the Securities and Exchange Board of
India (SEBI). In one such warning on Monday evening, SEBI said
Indian retail traders made net losses totalling 1.81 trillion
rupees ($21.67 billion) in futures and options trading in the
three years to March 2024. Tighter rules may follow.
    India's chief economic adviser V. Anantha Nageswaran offered
a veiled warning earlier this month against excessive
financialisation, which he defined as the dominance of financial
markets over the real economy.
        That could lead to high levels of public and private
debt, while increasing the reliance of economic growth on high
asset prices and worsening income inequality, he said at a
financial industry event, pointing to examples across global
markets.
    "India must be wary of these outcomes and avoid this trap,"
he said. "When the market becomes bigger than the economy, it is
natural, but not necessarily reasonable, that the market's
considerations dominate public discourse and influence policy."
    With share prices rising at a faster pace than economic
growth, India's market capitalisation-to-GDP ratio now exceeds
140%, the highest in more than a decade.
    Do you think the Indian markets are overheating? Write to me
at ira.dugal@thomsonreuters.com.  

QUOTE OF THE WEEK
"A thorough investigation into the allegations of an unsafe and
exploitative work environment is underway."
    India's labour minister Shobha Karandlaje on X after the
death of a 26-year-old associate worker at accounting firm EY.
The woman's mother blamed the death on stress and demanded
accountability. Labour department officials inspected the firm's
Pune office on Monday.
        EY said it placed "the highest importance on the
well-being of all employees", adding that it is "taking the
family's correspondence with the utmost seriousness and
humility".
    
MARKET MATTERS
With the Fed joining the global rate-cutting cycle, investors
are now watching meetings at central banks in Sweden and
Switzerland this week. Rate cuts are a key theme for global
markets in the final months of the year.
    Will the Indian central bank follow when it meets in
October? Food inflation could play spoilsport. 

 (By Ira Dugal; Additional reporting by Bharath Rajeswaran;
Editing by Edmund Klamann)