Despite global, macro worries, India’s valuation premium is highest this year

India continues to enjoy premium valuations as compared to its Asian peers


Currently, the one-year forward price-to-earnings (PE) multiple of the Indian equity market (MSCI India) stands at 17.31 times whereas the valuation of the MSCI Asia Ex-Japan index stands at 11.87 times. Further, the sharp correction in the Chinese equity market has weighed on the overall valuations of the index. This clearly shows that the gap between India’s valuations and its emerging market peers has increased. In fact, the premium is at the highest level in this calendar year so far.

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Source: Bloomberg and mint

Why is this important

The negative global cues driven by escalating US and China trade war have weighed down on economies globally. Besides, India is currently reeling under rising crude oil prices, persistent selling by foreign investors and the depreciating rupee which has adversely impacted the India’s macro scenario. 

However, even with negative cues hovering around, the India stock market continues to enjoy premium valuations of ~46% as compared to it’s Asian peers. Moreover, the gap has widened in valuations from 5.1 in Jan 2018 to about 5.44 at present which raises concerns.

What’s driving these valuations are:

  • Strong inflow of funds by domestic investors, which has more than compensated the outflows by foreign investors, and
  • Expectations of a much-awaited revival in India Inc’s earnings in the June quarter

Such high valuations could be a cause of worry for investors amidst the negative global cues. However, its worth noting that India has historically enjoyed higher valuations by +40% which could be a comforting factor. But macro issues cannot be overlooked and investors should remain cautious in the near term.

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