India stands out for cheap bonds as JPMorgan index date nears

India, along with Japan, has emerged as a favored pick among investors looking away from China

Indian equities have soared to become among the world’s most expensive, yet its bonds appear relatively cheap despite being Asia’s best performers this year.

The benchmark 10-year note offers a premium of almost 270 basis points over the earnings yield for the MSCI India share index, making the country’s debt more attractive to investors just months before its inclusion in JPMorgan Chase & Co’s indexes from June.

“A lot has not yet been priced in” by investors, said Ray Sharma-Ong, investment director at abrdn Plc. “We are both positive on both Indian bonds and stocks,” he added, noting that the JPMorgan index inclusion should boost potential fixed-income returns.

India, along with Japan, has emerged as a favored pick among investors looking away from China. That’s left Indian equities trading at about 22 times expected earnings over the next 12 months, versus 16 for Japan and nine for China, according to data compiled by Bloomberg based on MSCI Inc.’s indexes.

The stretched valuation has seen global asset managers trim their allocations to Indian stocks, pulling $1.1 billion so far in April. Expectations of few Fed rate cuts this year that hit risk assets have meant they also sold $1.3 billion of bonds this month, data compiled by Bloomberg show.

Still, attractive yields and one of the least volatile developing market currencies have boosted the appeal of India’s sovereign debt with investors such as abrdn.

“Both from a domestic and and international investor base, there’s lot more in terms of capital that can be committed to this market,” said Jitania Kandhari, deputy chief investment officer for solutions and multi-asset group at Morgan Stanley Investment Management. India “has the necessary conditions for growth, which is demographics, and is in a geopolitical sweet spot,” she said.