India's $590 billion rally faces critical tests with earnings and retail selling pressures

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Bloomberg. That’s above its 10-year average and more than 50% higher than the valuation for the broader Asian gauge.  Key gauges in India hit records in July on bets that Asia’s third-biggest economy will stage a strong recovery even with elevated policy rates. The rapid gains, which follow a 4% advance for the benchmark last year, have led Goldman Sachs Group Inc.

and CLSA Ltd. to warn that the equities are looking expensive. Global funds may find better bargains in other emerging markets after pouring $13 billion into local stocks this year as domestic retail traders turn net sellers.

“We do think that markets are not as attractive from a valuation standpoint as they were a quarterback," said Rupal Agarwal, quantitative strategist at Sanford C. Bernstein. Here are three charts on the investment case for Indian stocks: CLSA said on June 27 that valuations are “exceedingly rich" and analysts’ earnings expectations are too optimistic.

The stocks were overbought by some 14%, by its modelling. Goldman’s analysts argued that valuations are expensive and that there will be a consolidation in the third quarter. The valuation premium for stocks in the South Asian nation has risen sharply against that of an emerging market, Asian and global peers.

“In the short-term, the market has got stretched, so a 3-5% correction is on the cards," said Atul Suri, a fund manager at Marathon Trends Advisory Pvt Ltd. Surging food prices due to adverse weather for crops would also delay any potential pivot by the central bank to cut rates. Earnings growth for the MSCI India index saw its first downgrade last week after seven consecutive weeks of increases, according to data compiled by Bloomberg Intelligence.  “We think earnings estimates could