India's stock market is too expensive to justify, says Aswath Damodaran

The New York University finance professor, in a recent blog post, noted that while the US and China also fall into the expensive category, Indian equities are trading at significantly higher levels than most global markets across all three valuation metrics.

India is the most expensive market in the world, and no amount of handwaving about the India story can justify paying 31 times earnings, 3 times revenue, and 20 times EBITDA, in the aggregate, for Indian companies, according to valuation Guru Aswath Damodaran.

The New York University finance professor, in a recent blog post, noted that while the US and China also fall into the expensive category, Indian equities are trading at significantly higher levels than most global markets across all three valuation metrics.

Both the Nifty 50 and Sensex are currently around 10 percent lower than their all-time highs touched on September 27, 2024.

While high-growth markets like India often command a premium, Damodaran argued that such valuations must be justified by equally strong earnings growth. He cautioned, "At the wrong price, even the safest market with great historical returns are bad investments."

Also Read | FPIs go on a selling spree, offload Rs 7,300 cr in a week

Indian equities have outperformed global benchmarks over the past decade, fueled by robust corporate earnings, policy reforms, and a rising retail investor base. However, valuations remain steep, even after cooling off in 2024 with single-digit price appreciation.

"The best performing index in 2024, at least for the subset of indices that I looked at, was the Merval (Argentina’s benchmark), up more than 170 percent in 2024, and that European indices lagged the US in 2024," the post noted. "The Indian and Chinese markets cooled off in 2024, posting single digit gains in price appreciation."

Damodaran also underscored the influence of macroeconomic factors such as the strengthening US dollar, which gained 9.03 percent in 2024, and persistent inflation expectations that continue to shape global risk-free rates. These dynamics, he argued, further complicate the outlook for emerging markets like India.

Beyond valuations, the professor highlighted broader geopolitical risks, including rising nationalism and trade wars, which he believes have reshaped the investment landscape. "Trade wars (and tariffs) will make the world collectively less well off, but like all global shocks, they will create winners and losers," he remarked on X, formerly known as Twitter.

Global market capitalisation rose 12.17 percent in 2024, largely driven by the strength of US equities. Damodaran noted that this continues a two-decade-long trend where global diversification has failed to outperform a US-centric investment strategy.

According to his analysis, Latin America and Eastern Europe remain among the cheapest regions to invest in, though both come with significant risks. Japan, another relatively inexpensive market, faces structural challenges due to an aging population and low growth.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.