Growth Comfort Vs Valuation Concerns: What Will Drive Indian Equities?

The markets are overvalued, said seventy percent of the respondents in a BloombergQuint market poll conducted on the eve of the Modi government's third year anniversary. The interesting thing was that over 90 percent of the respondents believed that the markets will give a minimum return of 5-10 percent over the next 12 months. Keep in mind, that the Nifty's compounded annual growth rate for the last three years has been around 10 percent.

This means that over 90 percent of the smart market analysts believe that the markets will do well despite...

• Nifty/Sensex rallying over 30 percent in the last 3 years;
• Nifty/Sensex trading at approximately 18 times estimated earnings for the financial year 2017-18;
• Frothy price levels in certain mid-cap and small-cap stocks.

Also Read: Three Years Of Modi Government: Market Analysts' Poll

Why would this be the case? I tried to find pockets of optimism amidst writings and interviews of some of the large global and local voices. Sample a few...

Macquarie's Viktor Shvets says the firm's clients are invested in India because it is one of the few global and emerging market economies that is capable of delivering growth with a stable macroeconomic outlook with limited external vulnerabilities. Macquarie believes introduction of the Goods and Services Tax and robust use of technology to bypass bureaucracy are steps in the right direction. Together, these measures will create a base for less corrupt distribution of services and subsidies.

The long-term constructive stance on India in CLSA's Greed and Fear reports was strengthened by the Modi government's ordinance to tackle bad loans. CLSA believes there is renewed focus by the government to address the one area where it has fallen short – banking reforms.

Also Read: How Global Business Views Three Years Of Modinomics

Prominent local voices, on various media platforms, have been blowing the bugle of optimism. Everyone that I have heard – from Big Bull Rakesh Jhunjhunwala and the maverick Porinju Veliyath to one of India's largest fund managers S Naren are of the view that the growth story is intact.

There are a few more, but the point that I am trying to make is that people are making a case to invest in India due to a confluence of a lot of reasons – global factors, local liquidity, the government's reform push, the strong possibility of an earnings rebound, likely political stability etc. This overrides the valuation concerns, and it is very difficult to say when the pendulum will swing back. Typically, bull markets go from the bull phase to either the bubble phase or the bust phase. It certainly doesn't seem that we will see the bust phase anytime soon.

Niraj Shah is Markets Editor at BloombergQuint.