Indian equities are among the most expensive in terms of the cyclically adjusted price-to-earnings (PE) multiple among emerging and developed countries, as you can see from the chart by Barclays Research. Cyclically adjusted PE multiple is calculated as the price to 10-year average of real earnings. After Japan and the US, which are trading at 21.8 times price-to-earnings, Indian stocks are the most expensive as they are trading at a PE multiple of 20.8. Indian equities are looking expensive in comparison with other countries because the 10-year average earnings per share have been relatively low compared with the global average.
That is not surprising because gross domestic product (GDP) growth has remained below 5% for more than two years now and earnings downgrades have continued. Earnings revision may not happen in a hurry as HSBC Research in a note dated 3 July said reform implementation will likely take time. They expect the main policy push to materialize only next year once the administration is firmly established and has dealt with near-term challenges such as poor rain. Once adopted, it will also take some time before the reforms yield their expected growth dividend.
Increasing odds of a drought will hurt rural demand and stoke inflation, along with the looming threat of a spike in crude oil prices in wake of the Iraq crisis. These near-term headwinds will weigh on earnings growth. Barclays sums up: “Although we remain positive for the medium-term outlook, we do expect that following the election euphoria, Indian equities are likely to consolidate over the next six months.”
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