Since November 8, performance of Indian equities has been middling among emerging markets, though it should have been among the least affected, Neelkanth Mishra of Credit Suisse says, adding P/E decline being the third worst implies India-specific reasons.
The rupee has held its ground, down 3 percent against the USD, better than most other emerging markets. "This suggests demonetisation has affected sentiment, though our detailed interactions with more than 50 investors suggest most investors haven't acted yet," he says.
The FII outflows appear to be more ETF/EM allocation driven thus far. Lack of clarity on the lasting macro-economic impact of notes cancellation and potential disruption from GST is keeping active investors on the sidelines, he feels.
Given the many moving parts, the quantification of impact would take a few weeks, if not months, Mishra says.
However, a recent downgrade of cement, discretionary, and continuing underweight on NBFCs was due to - 12-15 months of uncertainty and P/E re-rating since FY12 reversing. This seems to be playing out, he feels.
Meanwhile, Ajay Kapur of Bank of America Merrill Lynch says India has shown strong improvement in current account since the 'taper tantrum' of 2013 and the currency has been relatively resilient this year.
But, the earnings recovery continues to be elusive and valuations at 20.0x trailing P/E and 2.9x trailing P/B remain expensive as compared with other emerging markets, he feels.
Clogged public sector banks' balance sheet, the impact of demonetisation in the short term and the consequent negative wealth effect as well as potential delays in implementation of structural reforms are likely causes of headwinds for the markets, according to him.
Ajay Kapur says despite being the biggest laggard this year among major emerging markets, investor positioning in India is still high - a contrarian negative.
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