Alarming bells for Indian stock market

Uncertainty surrounding upcoming elections, an ongoing debt issue, a government that’s making greater demands on the central bank and high valuations have kept investors on the sidelines.

India has wiped out $113 billion in value this year after winning the regional equity crown in 2018. Uncertainty surrounding upcoming elections, an ongoing debt issue, a government that’s making greater demands on the central bank and high valuations have kept investors on the sidelines.

Overall, stock funds took in a net 61.6 billion rupees ($866 million) in January, the least in two years and down 7 percent from the previous month, figures from the Association of Mutual Funds in India showed. After withdrawing money to start the year, foreign investors have only dipped their toes back in, with $117 million of inflows in February so far, according to data compiled by Bloomberg.

Domestic participation in the equity market has “sharply slowed” and “abruptly dropped” this year. Foreign portfolio investment flows into India have also been negative compared with other emerging markets.

Concern the forthcoming election is far from a shoe-in for Prime Minister Narendra Modi has also cooled risk appetite. Investors question whether the nation will get a clear mandate from any of the pre-poll alliances or whether India will have a “weak post-poll coalition coming together and forming a government, which might not be very stable,” Anand Shah, head of India investments at BNP Paribas Asset Management, said in a phone interview.

The India VIX Index has stayed above its three-year average this year, with a spike in cross-border tension only adding to the political uncertainty. High crude-oil prices have also worked against Indian equities and its currency, setting off a sell-off in the nation’s assets. The rupee is Asia’s worst currency this year, with a 1.9 percent slide.

With the S&P BSE Sensex Index now trading at 27 times earnings — near a record — and above its five-year average of 21 times, valuations may be less than attractive for investors.

The coming months will involve some volatility, for sure, as India’s rambunctious electorate participates in what famously is the world’s largest general election. Investors are likely to have the occasion to remind themselves that the best companies can gain share in a generally challenging environment. Long-term observers know that the opportunity in India remains very compelling.

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Source:The Hindustan times.

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