A sharp rally in domestic stocks from June lows has once again rendered Indian markets expensive to their emerging-market (EM) peers. The 12-month forward price-to-earnings (P/E) multiple for the Nifty50 Index is around 20.6x — 82 percent higher than 11.3 percent for the MSCI EM Index, a report by Business Standard stated.
"India’s valuation premium has hit a five-month high. This is on the back of sharp outperformance to EM and global peers from June lows and also due to earnings downgrades, following the April-June quarter of 2022-23 earnings," the report explained.
When the Nifty hit its 2022 high on January 17, India’s P/E at 25x was almost double MSCI EM’s, which was around 12.7x, however, when the Indian benchmark hit a 13-month low on June 17, the premium had shrunk to just 54 percent, informed BS.
"Indian markets have always commanded a premium to their EM peers. However, the current differential could be pricing in lofty expectations around corporate earnings and economic growth, say experts. Also, the rupee’s weakness against the US dollar and uncertainty around foreign portfolio investor (FPI) flows could cap further expansion in P/E," noted the report.
What has led to the expansion in India’s premium? For one, Indian markets are seen as being better placed, say the report.
“One should look at P/E in the context of interest rates and earnings growth. In terms of earnings growth, India is leagues ahead. Historically, India always had better-than-expected earnings growth. India is an island of growth. Valuation premium will sustain as long as growth momentum sustains. If there is any hit to growth due to disruption in commodity prices or geopolitical tensions, things will be different,” said U R Bhat, co-founder, Alphaniti Fintech.
India has the third biggest-weighting in the MSCI EM Index at 14 percent, after China (32 percent) and Taiwan (15 percent). Experts point out that the P/E of MSCI EM looks optically low due to China’s underperformance this year.
Beijing’s regulatory clampdown and resurgence of Covid in China has seen the MSCI EM Index crash 25 percent this year. The MSCI China trades at a 12-month forward P/E of less than 11x, noted the report.
