Add to this mix a geopolitical landscape that has shifted investor interest away from China, and you have a compelling investment proposition.
The problem is that it’s a popular trade. In the 1980s, it was a struggle to generate interest in Indian stocks, but what was once contrarian has become mainstream.
For example, India’s weighting in the influential MSCI All Country Asia-Pacific ex-Japan Index has doubled to more than 18% from just under 9% since the end of 2020.1,2 Index rebalancing has helped attract billions of dollars controlled by international investors into the domestic stock market. Chances are, we’re just getting warmed up.
What about valuations?
This is the one question that I hear repeatedly during investor meetings: Have Indian equities risen too far and too fast? Are they victims of their own success?
Most investors in Indian stocks are investing for the long term, which is a good thing. They are buying into the growth potential of the world’s fastest-growing major economy – one that is reaping the benefits of major reforms launched a decade ago.
Yes, we’ve seen a re-rating of stock prices, as many investors start to believe equity valuations should be higher on a sustained basis. There’s no doubt the Indian market isn’t cheap. Regulators had to intervene when speculative interest in smaller companies got too intense.
Given the bigger picture, we believe prices at these levels can be justified.
What do valuations look like?
So why are some investors getting nervous?
The strong get stronger
Indian stocks have always been more expensive than their emerging market peers. Over the past decade, the MSCI India Index has, on average, traded at 21.8 times earnings, while the MSCI Emerging Markets Index traded at 11.9 times earnings.3,4,5 This premium has only increased since the pandemic as the effects of reforms have fed through into equity markets.
A higher base
There’s much greater visibility over high-quality corporate earnings in India. The MSCI India Index is trading at some 26 times 2024 earnings forecasts – above recent average valuations (Chart 1). Since 2020, average valuations have risen to some 23 times earnings, from around 20 times.2 For comparison, the NIFTY 50 Index is trading at 22 times 2024 earnings forecasts.6
Chart 1. Re-rating in Indian stock prices
Are stock prices too high?
We don’t believe so, as these valuations are justified for four reasons:
1 The MSCI All Country Asia Pacific ex‐Japan Index is an unmanaged index considered representative of Pacific region stock markets, excluding Japan. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
2 "India overtakes China in world’s biggest investable stock benchmark." Financial Times, September 2024. https://www.ft.com/content/72864f6a-8b48-4638-84e1-1da5f03d3484.
3 The MSCI India Index is an unmanaged index that is considered representative of Indian stocks. The index is computed using the gross return, which does not withhold taxes for non‐resident investors.
4 The MSCI Emerging Markets Index℠ is an unmanaged index considered representative of stocks in developing countries. It is computed using net return, which withholds applicable taxes for non‐resident investors.
5 Bloomberg, September 2024.
6 The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.
7 Bank of America, August 2024.
8 Bloomberg, Jefferies, February 2024.
9 Avendus Spark Research, June 2024.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Indexes are unmanaged and have been provided for illustrative purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
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