A $33 Billion Manager Says History on Side of Indian Stocks

  • Stocks cheap by price/book, market-to-GDP: ICICI Prudential
  • Capacity utilisation to improve over two years: CIO Naren

The Bombay Stock Exchange in Mumbai.

Photographer: Dhiraj Singh/Bloomberg

Viewed against its regional peers, the rallying Indian stock market is expensive. Looking at it in terms of its own past, however, a case can be made that there’s room to rise.

It’s a case the nation’s top fund manager is willing to make.

The NSE Nifty 50 Index rallied to an all-time high on Tuesday after Prime Minister Narendra Modi’s resounding victory in state elections. While the advance drove it above Japan as the most expensive market in the region relative to earnings and book value, the latter metric was higher in India as recently as two years ago.

Another indicator, one favored by Warren Buffett that compares overall market capitalization to the size of the economy, tells a similar story. The value of Indian equities has climbed to $1.82 trillion, a nine-year high, after the Nifty gauge rebounded from a low in December as data showed Asia’s third-largest economy is recovering from Modi’s decision late last year to junk high-value currency notes. That was about 87 percent of the nation’s GDP.

This ratio, described by Buffett as “the best single measure of where valuations stand at any given moment” in a December 2001 article for Fortune magazine, peaked at 147 percent at the end of 2007, foreshadowing the slump in local equities the following year in the wake of the global financial crisis.

“On a price-to-earnings parameter, markets look expensive, but on a price-to-book and market cap-to-GDP basis, they look cheap,” S. Naren, the Mumbai-based executive director and chief investment officer at ICICI Prudential Asset Management Co., said in an interview. The fund house has $33 billion in assets.

The S&P BSE Sensex, the nation’s benchmark gauge, headed for a record, rising 0.3 percent to 29,698.05 at 9:23 a.m. in Mumbai.

Peak Valuations

Investors looking to take Naren’s case as an all-clear sign should be aware of what happened after stocks reached peak valuations in 2007 and 2015. While the current market has room to run to get back to those levels, both gave way to protracted declines: about 23 percent to a trough in 2016, and 52 percent in 2008 during the global financial crisis.

Shares in the index trade for 2.9 times book value now versus 3.1 in March 2015, data compiled by Bloomberg show. At 22.5, its P/E ratio is roughly the same as its high in 2015.

Indian stocks rebounded from a six-month low in December as flows into funds accelerated after Modi’s cash ban damped the appeal of gold, and global funds became net buyers in February for the first time in five months. Like in the biggest markets, traders have shown little concern over potential turbulence ahead.

No Anxiety

The India VIX Index, a gauge of expected stock-price swings, touched a record low on Thursday, taking the week’s slump to 15 percent. That worries Naren.

“There should be volatility as that is when the people recognize that there’s something called risk,” he said. “If markets go up in a straight line it is a bigger problem.”

Still, Modi’s victory in elections have boosted expectations for kick-starting spending by the private economy. While India’s economic growth has been 7 percent or more in each of the last four quarters, credit to companies is growing at the slowest pace in a quarter century as lenders struggle to clean out bad loans.

“We think capacity utilization and the operating cycle will improve over the next two years, which is good news,” said Naren. “The markets can move ahead of the improving economic cycle at some point in time.”

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