Five reasons why India will continue to trade at a premium to Emerging Markets.
– Better Corporate Governance though there are some companies where corporate governance standards are doubted, like JP Associates, Sterlite Industries, ADAG companies, DLF (Sensex) and Unitech (Nifty). But the weightage of these companies in Sensex is around 10% in aggregate which is not so high compared to other Emerging markets. Satyam was an isolated case. In Korea, there is an issue of corruption.
– High ROE’s: In FY10, Sensex ROE is expected to be around 17% which is higher compared to 14-15% for Emerging markets.
– Diversified across sectors: Sensex constituents are diversified across various sectors with cyclicals and non-cyclicals. Going ahead RIL’s share from cyclicals business will be less than half the total revenues. Brazil and Russia are basically commodity exporters which means they will continue to trade at low PEs. 50% of Taiwanese Index is Tech.
– Domestically demand driven economy: India’s demographics and low exports share to GDP make it less vulnerable to external threats. On the other side, India is dependent on capital inflows.
– Healthy Corporate balance sheets with relatively low debt to equity, reasonable cash balances and freshly added stock.