Domestic equity valuation premiums to both the emerging and world markets have shrunk by a fourth since October, a report by Business Standard stated. However, Indian markets remain expensive vis-à-vis most global equities, which, the report observed, is justified, given India’s better growth prospects.
Currently, the Morgan Stanley Capital International (MSCI) India index commands a 12-month forward price-to-earnings (P/E) multiple of 21.6x, informed BS. In comparison, the MSCI Emerging Markets (EM) and the MSCI World indices trade at 11.3x and 16x, respectively, it added.
It further pointed out that in October, India’s P/E was 2.2x that of MSCI EM and 42 percent higher than MSCI World. In that period, the MSCI EM slipped to single-digit P/E, largely on the back of a sharp sell-off in the China markets, noted the market daily.
According to BS, the narrowing of India’s valuation premium comes on the back of underperformance in the domestic markets over the past few months, with markets like China and Europe playing catch-up.
China still trades at a modest P/E of less than 11x — nearly half of India’s. However, experts believe the gap may not narrow much, stated the report.
BS also highlighted that most European markets and key Asian markets have seen an expansion in their P/E multiples this year, however, India has seen slight derating, partly due to the sell-off in Adani Group stocks and also on the back of modest third-quarter earnings.
“Two Adani Group companies are part of the Nifty and the volatility in group stocks did impact overall valuations for India,” UR Bhat, co-founder, Alphaniti Fintech, told the market daily.
Experts believe the valuation gap could remain at current levels and may not reach the levels seen last year, given near-term uncertainties, as per the report.
Credit Suisse Wealth believes India’s premium could remain at elevated levels, it said.