Indian market P/E trend continue to stay elevated

India Infoline News Service | Mumbai |

Credit Suisse analysed trends in the three markets that have seen volatility around change of government in the past two years, i.e., Mexico, Japan, and China.

Given the historical verdict and the promise of significant economic revival, it has been challenging to understand how long the rally in India will last, and what its characteristics would be. Therefore, Credit Suisse analysed trends in the three markets that have seen volatility around change of government in the past two years, i.e., Mexico, Japan, and China.

Below are the highlights of Credit Suisses India Market Strategy report titled Lessons from Mexico, China and Japan - Election efforts fade

Medium-term P/E trend continues. We looked at the impact of government change on markets in Mexico, China and Japan. Mexico and China saw gains before the change, whereas in Japan most gains came in the following six months. All three markets are down since. However, looking at P/E and EPS separately, we found that after two-five months the medium-term P/E trend resumed: up for Mexico, down for China, and sideways for Japan. Except for the JPY fall in Japan, reforms have not yet impacted earnings.

Globalisation of markets. Looking at sector-wise trends in the six months post elections, we found that industrials and materials outperformed in Mexico, but this was likely due to their US exposure (51% of MSCI Mexico sales are external). Earnings changes in Japan were remarkably undifferentiated, suggesting only yen depreciation helped earnings: exporters and those with USD prices saw strong upgrades. In China, IT (mainly internet) and utilities saw earnings upgrades.

Expect continued market strength. The MSCI India P/E re-rating started in June 2012 and we expect it to continue: rising global risk appetite and growth bottoming in India should provide support. However, as election-related 'euphoria' dissipates in a few months, PSUs, mid-caps, and over-leveraged companies should correct: these have gained the most since elections.


 

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