Why are overvalued India equities still attracting foreign investors?

I'm not sure how many of us are aware of the fact that India equity market had an outstanding performance for the year 2014. Looking at the performance of India Stock Exchange (commonly known as Nifty), the index managed to achieve a double digit gain of 33.14% in 2014 alone!

Nifty returns 33.14% in 2014

With India equities making great gains in 2014, many analyst are saying that the India market has fallen into the overvalued category. As a matter of fact, in one of my older post on undervalued countries as of August 2014, India sits at the top of the overvalued category. 

Despite the above, India equities have managed to defy all odds and posted an incredible return for 2014. However in 2015, latest market valuation has made India an unpopular choice for many investors. Its current Fwd P/E of 18.3 is way above the 10 year average of 15.9.

In addition, a report by JP Morgan dated 30th June 2015 indicates that India equities are valuated at +4.5 standard deviation from the global average as shown below:

India Overvalued

How about 2015?

A peak into Nifty's YTD for 2015 indicates that the index is at -0.7% as of 28th July 2015.

Flat Nifty as of 28 July 2015

Further scrutiny shows that for the first 6 months, the Nifty actually shed 5.12% with a low point of 7965.35 points recorded on the 11th of June 2015. After which from the 11th of June 2015 till 22 July 2015, the Nifty enjoyed a brief rally by gaining 8.39%!

Brief Rally, Nifty gains 8.39%

The Nifty rally from Mid June till the 3rd week of July 2015 was partially supported by net inflow of foreign funds as indicated by data taken from MIDF Research. Beginning from week ending June 26th till week ending July 24th (except week ending July 3rd), we can see a large amount of net inflow of USD being invested into India.

Hundreds of million of net inflow within a one month period.

Why the sudden interest India?

Positive economic outlook as stated below:

The economic recovery continued with encouraging growth and inflation numbers. 

• Index of industrial production expanded at pace of 4.1% y-o-y in April 2015 (against 2.1% in March 2015). 
• Inflation consumer price index continued to stay at moderate levels at 5.01% in June 2015, close to the levels seen in May 2015. 
• During its June 2015 policy meeting, the Reserve Bank of India announced an interest rate cut of 25 basis points. 
• Banks continued to cut their lending rates in June 2015 and we expect rates to be gradually lowered going forward, which will help economic recovery.
• Purchasing Managers' Index for India is at a healthy 51.3 (above the 50 level)
• IMF's target growth projection for India is 7.5% (which exceeds that of China)

Further optimism if:

Important bills such as the Goods and Services Tax bill and the land acquisition bill due to be taken up in the upper house during the monsoon session of parliament set to begin in July 2015. Successful passage of these bills will be an important determinant of the confidence of the market in the government’s ability to push through reforms.

Biggest challenge for India?

• Lower than expected rainfall during the monsoon season, which may have a negative impact on agricultural income. In addition, the agricultural export for India might suffer this year as highlighted in this article entitled "Agri Export Outlook Not Bright for India" from the Financial Express. 
• Failure to pass the GST bill could also be another problem that deters growth for India. India is in need of a single tax system (such as GST) in order to wipe out the various taxes and levies currently in practice. 

Summary

Many articles, reports and valuations on India paint a picture of minimal opportunity for investment. No doubt the reasons for the poor outlook are based on fundamental evaluations as seen by the data provided in this article. 

What irks me most is that despite the poor valuations, massive amount of foreign fund are flowing into India over the past one month. Why is that so? Is there an expectation of a short term rally? Perhaps overvalued is just an interpretation that does not justify the vast opportunity offered by the equity market of India?

Despite not having the answers for my own self posed questions, I believe there are enough facts and data in this post for you to do additional research and determine for yourself whether it is worth investing into India or not.

If the answer is yes, there's one feeder fund which invest directly into India that you may consider. Just email me at shanesee03@gmail.com if you like to find out which fund is it.

That's all for this post!

Cheers and have a great week ahead.