Earnings should rise for durably dearer shares

livemint.com:

₹1.1 trillion so far in 2023-24. In just over three months, that is. At this pace, foreign buying could easily top the ₹2.7 trillion plus recorded in 2020-21, which was the last time their flows into our equities were positive (and also the highest in decades).

The price-earnings (PE) ratio of shares is currently below bloated levels of the past. Though the latest rally has pushed up the Sensex’s PE ratio to just over 24, it’s well under the high 30 level recorded in 2021-22. If projected earnings for 2023-24 are used instead of past figures, that ratio would be lower.

And we must also note that this index isn’t reflective of the entire market, which has small-cap stocks that look cheaply priced. All this has seen foreign investors keep the money flowing in despite India’s interest rate premium over equivalent US assets having reduced over the past year as America’s central bank opted for a sharper reversal of easy money than ours to fight inflation. By past patterns, our markets tend to attract foreign money when the rate differential widens over the US—and vice-versa.

We saw outflows as tighter policies first got underway in 2022-23, just as asset market analysts had expected, but now that rate policy is on a pause in the US as well as here, with the US having tightened more, our sustained inflows are a surer sign of global interest in Indian assets. So long as there are investible funds to go around, we could expect a portion to head this way. What foreshadows this cheery narrative, however, is how the policy implications of America’s peculiar post-pandemic recovery may impact FPI strategies.