The winning streak is waning for Indian equities as sentiments have been soured by tighter monetary policy and prospects of smaller stimulus spending in the coming year.
India’s benchmark S&P BSE Sensex has fallen 3.6% since late September, halting a rally that lasted six consecutive quarters and doubled the value of the index. Since hitting record highs in October, the gauge has been on the verge of a technical correction, with foreign investors pulling more than $4 billion out of the market over the past three months.
Historically high valuations have also alarmed some analysts. India’s leading equity gauge is trading at 20-21 times its estimated 12-month profits, compared to 12 times the MSCI Emerging Markets Index.
“Lack of monetary policy support and fiscal support in the coming year could have a negative impact on global growth as well as equity valuations,” Credit Suisse Group AG analysts Jitendra Gohil and Premal Kamdar wrote in a note this week.
According to the India Wealth Unit of Standard Chartered plc, the withdrawal of monetary stimulus could trigger a surge in volatility reminiscent of 2003 and 2009, when prices were volatile, while equity returns remained modest.
According to its research note, India’s equity market is likely to transition from “early-cycle to ‘mid-cycle’ as monetary policy normalizes as central banks become less accommodative.”
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