India’s valuation gap with global markets has shrunk to its lowest since the pandemic, even though it continues to trade at a premium to other emerging markets by historical standards.
Based on Bloomberg Consensus one-year forward earnings estimates, the MSCI India Index which is the benchmark for most India-dedicated funds, is trading at a multiple of 20.02x compared to 20.39x for the MSCI US, indicating a marginal discount. This differential between India’s P/E multiple and the US stood at 3.36x in December 2022.
Similarly, the P/E differential between MSCI India and the MSCI World Index was 5.21x in December 2022 but has now narrowed to 1.71x. The current differential is more or less in line with the five-year pre-Covid average, when it stood at 0.48 (MSCI India vs. MSCI US) and 1.84 (MSCI India vs. MSCI World) respectively.
However, when compared with global emerging markets, India’s valuations still appear expensive by historical standards. India currently commands a premium of 7.84x over the MSCI Emerging Market Index, with MSCI India’s P/E at 20.02x against MSCI EM’s 12.18x. While this is significantly lower than India’s valuation differential at its peak of 10.56x in December 2021 (when MSCI India stood at 22.86x and MSCI EM at 12.80x), it remains higher than the pre-pandemic five-year average (2015-2020) of 6.49x.
India’s premium valuations over the emerging market basket over the past year, largely driven by a sharp rise in earnings (following depressed earnings pre-pandemic) and rising stock prices post-pandemic, were also influenced by the depressed valuations in Chinese equities.
Chinese stocks saw a collapse in P/E multiples due to falling stock prices since 2020, triggered by Xi Jinping’s anti-business stance, a sluggish post-Covid recovery, and systemic property market issues weighing on sentiment. However, after Chinese P/E multiples contracted from 15.38x in 2020 to 9.04x in December 2023, they have recovered in 2024, rebounding to 11.47x—closer to the five-year pre-pandemic average (2015-2020).
Thus, on a relative basis, the Chinese market is currently trading slightly below its pre-pandemic five-year average multiple (11.47x vs. 11.88x), the MSCI EM index multiple is marginally higher (12.18x vs. 12.13x), but Indian markets still trade at about a 7 percent premium to their pre-pandemic levels.
India’s high valuations have been seen as a prime culprit in keeping foreign investors from investing in the country. As valuations drop with the precipitous fall in stock prices, it will be interesting to see if foreign investors are tempted to review their India allocations once again.
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