The runaway rally in the Indian equity market has hit a pause, with some nervousness creeping in.The benchmark index Nifty50 is down 3% or 780 points so far in October or the past seven trading sessions. In the said period, the MSCI India Index lost 2.7% versus a 2% fall in the MSCI Asia ex-Japan Index. In effect, the fear gauge, India VIX, has shot up 13%, indicating risk aversion.
Foreign investors’ interest is likely returning to China after it announced a large stimulus to propel the ailing economy in September. With market expectations of more fiscal stimulus ahead—likely anywhere from CNY2-3 trillion to as high as CNY10 trillion—there is a rising risk of some near-term underperformance of India equities against the broader Asia ex-Japan Index, said a Nomura Global Markets Research report on 7 October.
Despite a steep valuation premium, the Indian benchmark indices are frequently hitting new highs. At a one-year forward price-to-earnings, the MSCI India Index trades at a multiple of around 24x versus 12x and 11x for MSCI Asia ex-Japan and MSCI Emerging Markets indices, respectively, showed Bloomberg data. Thus, the recent fall hasn’t offered comfort on India’s valuation multiple.
Most of the Indian large-cap, mid-cap and small-cap stocks still remain quite overvalued, Kotak Institutional Equities said in a report dated 8 October.“In our view, the 'true' value of most large-cap stocks is about 60-80% of the current market capitalization, while the ‘true’ value of many mid- and small-cap stocks is about 25-50% of the current m-cap even after the recent correction,” it added.
Nonetheless, investors can no longer ignore India’s rich valuations, especially if there is a slowdown in foreign and/or domestic flows. After remaining net buyers of Indian stocks in the past four months, foreign portfolio investors have sold Indian stocks worth ₹43,867.83 crorein October, showed NSDL data until 9 October. Domestic institutional investors bought stocks worth ₹50,182.35 crore.
Further, the September-quarter (Q2FY25) result season is expected to be sluggish, with companies likely to report muted trends on important metrics and earnings growth showing divergence across sectors.“As we saw in Q1(FY25), we see more misses than beats in Q2, particularly in consumer discretionary, materials and financials,” said the Macquarie Capital Securities (India) report on 9 October. Macquarie continues to see earnings expectations fatigue and downside to the consensus forecast of 15% two-year earnings per share CAGR for MSCI India. CAGR stands for compound annual growth rate.
Meanwhile, the World Bank raised its growth forecast for South Asia to 6.4% in 2024 from an earlier estimate of 6%. One factor backing this improvement is the strength of domestic demand in India, the World Bank said on Thursday. Recently, the World Bank raised India's FY25 economic growth forecast to 7% year-on-year from 6.6% earlier. The jump is expected to be aided by a rebound in agricultural output and increased private consumption.
To be sure, stimulus measures typically show results with a lag, so the actual impact on the Chinese economy remains to be seen. Hence, it is too early to gauge whether this theme of investors shunning India for China would be short-lived. However, India’s fundamentals, mainly earnings growth, remain an important factor to justify its valuation premium over peers. Plus, geopolitical tensions in the Middle East are keeping crude oil prices on edge and may push them higher. Movement in crude oil prices tends to impact India's, a net oil importer, trade balance and inflation outlook.
