“Looking at a single metric of value or P/E is not a fair way to judge the market at a point when domestic economic activity is bottoming out, and you have such high liquidity,” she said. “We are buyers of businesses. We are looking at corporate earnings, the domestic economy, flows and risk appetite.”
India’s benchmark S&P BSE Sensex has rallied around 90% from its low during the March swoon in 2020, hitting fresh records on the way. The rally fueled by central bank liquidity and incessant foreign inflows has the gauge trading at 23 times its 12-month forward earnings. That’s versus a five-year average multiple of 19 times.
Gupta’s optimism is at odds with rising concern among many market watchers that stock prices in India have run ahead of themselves as the economy braces for its biggest annual contraction in records going back to 1952.
Last week, the Reserve Bank of India also warned about the rally, citing a widening “disconnect” between certain sections of the financial markets
and the real economy. The RBI will also start draining cash from the banking system as it seeks to revert to normal liquidity operations from pandemic-imposed emergency measures.
Gupta, on the other hand, points to improving corporate earnings and the strength shown in recent months by high-frequency economic indicators such as exports, automobile sales and manufacturing output amid an uptick in consumption. Analysts surveyed by Bloomberg have revised up 12-month estimated earnings for Sensex members by about 20% since a trough in July.
“A lot of the uncertainty surrounding markets
has ebbed,” she said. “The second quarter was good for company earnings led by margin expansion, the tail risk for banks has been contained and a couple of government reforms in the pipeline tell you that the downside risk isn’t very high.”
Foreigners continue to pile into Indian stocks, having bought a net $2.2 billion in two weeks in the new year, after pumping in $23.4 billion in 2020. That was the most since 2012.
“Vaccines and the low interest environment that we are in could be a very good thing for emerging markets” like India, said Gupta. “We are hoping to see a scenario of better-than-expected performance for the corporate sector. With lockdowns opening up, we expect revenues to come back.”