India’s stock-market rally has failed to keep up with the fastest increase in profit estimates since 2009, making sharescheaper even as the S&P BSE Sensex index rises to all-time highs.

While the benchmark gauge has gained 5.8 percent in the past two months and rose to a record yesterday, 12-month profit projections have climbed 7.2 percent, according to about 800 analyst forecasts compiled by Bloomberg. The Sensex is valued at 15.5 times estimated profit, down from this year’s high of 16.3.

The improved outlook for Indian earnings underscores how falling oil prices are reducing import costs while confidence is growing that Prime Minister Narendra Modi’s policies will revive the economy after he won the May election by the biggest margin in three decades. The projected 21 percent jump in Sensex profits in the next 12 months compares with an 11 percent growth estimate for the MSCI Asia Pacific Index. (SENSEX)

“The market is not fully factoring in the higher earnings growth in the next few years,” Mahesh Patil, the co-chief investment officer at Birla Sun Life Asset Management Co., which oversees $16.3 billion, said in an interview on Aug. 26. Indian shares may return about 18 percent annually over the next four years, in line with earnings growth, he said.

Modi has so far taken steps to cut bureaucracy, speed up project approvals, reduce income taxes and allow more foreign investment in the defense and railway industries. In his Independence Day speech on Aug. 15, he pledged to provide bank accounts and life insurance for millions of poor people and revive manufacturing in Asia’s third-largest economy.

David Fuller's view

I have previously described Narendra Modi’s landslide victory as the most important election result of the year, but it could be far more important. 

India’s Sensex Index (weekly 10-year & weekly 5-year) is currently up 28.51% in USD terms this year, so it is gratifying to read that the valuation has actually decreased slightly.  The rising lows indicate that demand still has the upper hand during consolidations.

I have participated in India via the JPMorgan Indian Investment Trust (JII LN) since 2003, occasionally adding on setbacks.  Its underperformance relative to Sensex generally reflects sterling’s earlier strength relative to the rupee, although the latter currency is now stable, given increasing confidence in Raghuram Rajan, Governor of the Reserve Bank of India.  JII currently trades at a discount to net asset value of 12.55%, according to Bloomberg.  I would not be surprised to see this move to a surplus in the next few years as more investors become interested in India.  However, if I was looking to add to my India position on small setbacks, I would now choose the New India Investment Trust (NII LN), managed by the brilliant Hugh Young of Aberdeen Asset Management, and I may eventually switch into this because of its superior performance and smaller market capitalisation.  NII currently trades at a discount to NAV of 11.71% and has a market cap of only £160 million, compared to JII’s £464 million.