BL Research Bureau

Amid growing concerns on India’s economic growth and weak corporate earnings, the Indian stock market has been the worst performing market so far in 2019. The higher tax surcharge on foreign portfolio investors (FPIs) announced in the Budget, further pulled the rug from under investors over the past month.

After delivering a nothing-to-write-home-about returns of 7 per cent in calendar 2018, the Sensex has delivered a muted 3.5 per cent returns so far in 2019. The Nifty, that delivered 4 per cent return in 2018, posted a modest 1.5 per cent return in 2019 so far.

In contrast, other emerging markets have delivered healthy returns — Brazil (Bovespa Index 17 per cent), and China (Shanghai Composite Index 12 per cent). The US market’s performance has stood out — with S&P Index and NASDAQ delivering 15 per cent and 18 per cent respectively.

Other global indices — FTSE and DAX have also fared better than Indian market delivering 7 per cent and 11 per cent respectively.

FPI selling

Since 2012, FPIs have been net buyers in the Indian equity market. But the flows have been moderating since 2015.After annual net inflows of about ₹1-1.3 lakh crore between 2012 and 2014, flows dwindled to ₹17,000-20,000 crore in 2015 and 2016. In 2017, FPI inflows improved — they were net buyers to the tune of ₹51,000 crore. But in 2018, FPIs turned net sellers — net outflows of ₹33,000 crore.

Also read: Super-rich cess on FPIs will account only for 1% of estimated mop-up

In 2019, barring the month of January, FPIs have been net buyers into Indian equity upto June. In July and August (upto August 9), FPIs have turned net sellers — net outflows amounting to ₹22,000 crore so far. The budget proposal of tax surcharge on FPIs spooked investors, and there are now news reports that suggest the government may re-consider this move.

Despite the outflows in the past month, FPIs are still net buyers to the tune of ₹56,000 crore in 2019.

Valuation

Indian indices are trading just near around their 10-year historical averages.

Trading at about 17 times its one-year forward earnings, the Nifty is slightly above its historical average of about 16 times. It has traded at lofty levels 20-21 times in 2015. But in light of the weak show put up by India Inc so far, it is unlikely that valuations would move up significantly.

Earnings growth continues to be weak for India Inc in the quarter ended June 2019 — with profit (excluding banks and finance companies) dropping by 6-odd per cent.

Given a weak domestic demand and slowing global growth, it is unlikely that earnings will move up significantly in the ensuing quarter. Nifty earnings have been muted in the last few years. After growing by 7 per cent in calender 2018, Bloomberg estimates earnings growth of a much higher 25 per cent in the current year.

While a low base can optically aid growth in profit, earnings growth can disappoint expectations — leading to some more profit booking from the Indian market.