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Indian Stock Market At All-Time High: Has The Sensex And Nifty Rally Made Valuations Untenable?

The S&P BSE Sensex has gained 13 percent this year, the most among the 10 biggest stock markets, as local investors throng to equities amid declining returns from the traditionally preferred assets of gold and real estate.

The S&P BSE Sensex has gained 13 percent this year, the most among the 10 biggest stock markets, as local investors throng to equities amid declining returns from the traditionally preferred assets of gold and real estate.

The S&P BSE MidCap Index is up 23 percent, rising every month this year — the best start in a decade.

India’s share market rally — even more pronounced in smaller stocks — is giving an index-beating money manager a pause.

Motilal Oswal Asset Management Co. has stopped accepting new money for its Next Trillion Dollar Opportunity Strategy, which mostly invests in small and mid-cap stocks, because it says the rally has made valuations untenable. The 56-billion rupee ($875 million) fund for wealthy individuals has risen about 19 percent a year since it was started in December 2007, twice as much as its benchmark.

“It kind of became a problem of plenty for us,” said Manish Sonthalia, chief investment officer at Motilal’s wealth management unit, which has 103 billion rupees in assets. “I will remain rational even if the market continues to be irrational.” The fund is turning down new investors for the first time, he said.

The S&P BSE Sensex has gained 13 percent this year, the most among the 10 biggest stock markets, as local investors throng to equities amid declining returns from the traditionally preferred assets of gold and real estate. It rose above the 30,000 mark for the first time on Wednesday. The S&P BSE MidCap Index is up 23 percent, rising every month this year — the best start in a decade.

“When this sort of money comes, it tends to chase the mid- and small-cap stocks,” said Sonthalia. “Too much money is chasing too few stocks in India.”

The BSE mid-cap index has 85 members with a median market value of about 200 billion rupees, with as many as 78 percent of its constituents trading above the 200-day moving average, the highest proportion since October. It has outperformed the MSCI World Mid Cap Index, which has gained 8.3 percent this year.

Some of Sonthalia’s caution is reflected in domestic mutual funds’ cash positions. Levels at equity funds climbed to an average of 6 percent of assets for the March quarter, according to data from Morningstar Investment Adviser India Pvt. That’s the biggest proportion since 2012.

Local funds are receiving inflows of about 40 billion rupees every month, according to the Association of Mutual Funds in India. They were net buyers of equities for eight months through March, including a record 138 billion rupees in November 2016, with much of this money flowing into mid-cap stocks.

Sonthalia now prefers larger stocks that make up the benchmark Sensex and the NSE Nifty 50 indexes. They haven’t rallied as much as the smaller ones relative to earnings, he said.

“I have a long-term bullish view on the Indian story but the long-term is made of a number of short-term periods,” Sonthalia said.

Why Sonthalia is bullish over the long term?

“There are three to four big themes which will make you money: first is Prime Minister Narendra Modi’s emphasis on affordable housing. Developers, mortgage lenders and makers of construction materials will gain.” “The second is implementation of the national sales tax, which will lead to more businesses getting absorbed in the formal economy.” “Thirdly, the inability of state-run banks to lend is an opportunity for private lenders and non-bank finance companies. If the economy has to grow at 6 to 7 percent, it will need a pickup in credit growth.” “Software and pharma exporters are our contrarian bets. These stocks seemingly appear to offer no growth. For us, the story is not over.”

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