MUMBAI:
The Indian equity market is currently experiencing a pause in its remarkable rally, marked by a growing sense of caution among investors. The benchmark index, Nifty50, has seen a decline of 3%, equating to 780 points, throughout October, encompassing the last seven trading sessions. During this same timeframe, the MSCI India Index has dropped by 2.7%, while the MSCI Asia ex-Japan Index has had a relatively moderate decline of 2%. Consequently, the India VIX, a measure of market volatility or risk perception, has surged by 13%, indicating an atmosphere of increased risk aversion.
Recent market dynamics suggest a shift in foreign investors’ attention back to China, particularly after its announcement of substantial stimulus measures aimed at revitalizing its faltering economy in September. Experts anticipate further fiscal measures ranging anywhere from CNY2-3 trillion to a staggering CNY10 trillion. This prospect heightens the likelihood of a short-term underperformance of Indian equities compared to the broader Asia ex-Japan Index, according to a Nomura Global Markets Research report released on October 7.
Despite being characterized by steep valuations, Indian benchmark indices continue to reach new heights. Currently, the MSCI India Index is trading at a one-year forward price-to-earnings (P/E) ratio of approximately 24x, in stark contrast to 12x for MSCI Asia ex-Japan and 11x for MSCI Emerging Markets indices, as indicated by data from Bloomberg. Thus, even with the recent market correction, there appears to be little relief regarding India’s elevated valuation multiples.
According to Kotak Institutional Equities, many Indian large-cap, mid-cap, and small-cap stocks remain significantly overvalued. The firm estimates that the ‘true’ valuation of most large-cap stocks is about 60-80% of current market capitalization, while the intrinsic value of many mid- and small-cap stocks hovers around 25-50% of their current market cap, even after recent corrections.
Investors must now weigh India’s rich valuations more carefully, particularly in light of potential slowdowns in both foreign and domestic fund flows. Following four months of net purchases, foreign portfolio investors have offloaded Indian stocks valued at ₹43,867.83 crore in October, as per NSDL data up to October 9. Meanwhile, domestic institutional investors have been active in the market, acquiring stocks worth ₹50,182.35 crore.
Corporate Growth, GDP Forecast, and Oil Prices
As we approach the September-quarter (Q2FY25) earnings season, expectations are low, with companies likely to exhibit lackluster metrics along with earnings growth disparities across various sectors. The Macquarie Capital Securities (India) report, dated October 9, indicates that more companies are likely to miss earnings targets than to meet them in Q2, particularly in sectors like consumer discretionary, materials, and financials. Macquarie foresees an ongoing fatigue in earnings expectations and a downward adjustment to the consensus forecast of a 15% compound annual growth rate (CAGR) in earnings per share for MSCI India over the next two years.
On a positive note, the World Bank has recently upgraded its growth outlook for South Asia to 6.4% for 2024, up from a prior estimate of 6%. This improvement is largely attributed to robust domestic demand in India, leading the World Bank to also revise India’s FY25 growth forecast to 7% from 6.6%. This optimistic revision is expected to be bolstered by a resurgence in agricultural productivity and heightened private consumption.
It’s essential to note that the impact of stimulus measures typically manifests with a delay, leaving uncertainties about the actual momentum of the Chinese economy and whether foreign investors’ inclination toward China will impact their views on Indian stocks in the long term. Despite these challenges, India’s foundational strengths, particularly in terms of earnings growth, remain pivotal in justifying its premium valuations over its peers. Additionally, ongoing geopolitical tensions in the Middle East could lead to spikes in crude oil prices, which, in turn, might adversely affect India’s trade balance and inflation outlook, given that India is a net oil importer.
