The valuation premium of Indian markets to other emerging peers is on the decline, despite benchmark indices hitting record highs. MSCI India is trading at a 47.95% (one-year forward price-earnings multiple) premium over MSCI Emerging Markets (EM), declining from a 52.27% premium it had on 28 September, the highest ever touched this fiscal.
The current price to earnings (PE) ratio of MSCI India is at 22.37 times, based on FY22 earnings, while MSCI EM is at 15.12 times, which makes India one of the most expensive markets, according to data from Bloomberg.
“Typically, India has always been at a premium over emerging markets. The decline in the premium may be because valuations of other key emerging markets are expanding,” said Nitin Bhasin, head of equities research at Ambit Capital.
Global flows have been increasingly shifting to EMs, including India, over the past few months, said Bhasin. Factors such as higher commodity prices, a weak dollar, earnings improvement and expectations of a quicker economic recovery are making other EMs besides India attractive for foreign fund managers, he said.
“Fund managers are favouring other markets in EMs too now while India has been in a sweet spot for some time. For instance, return on equity for MSCI India is expec-ted to be around 13% in 2021 from 9% this year, while it is estimated to expand to 10% next year from 8.6% in 2020 for MSCI EM,” he said.
G3 central banks, which include the US, Germany and Japan, alone have expanded their balance sheets by $7 trillion this year so far. This has proved critical in supporting equities after the coronavirus outbreak. The rally of MSCI India since March has outpaced peers in the MSCI EM index, driven by massive global liquidity. Since the March lows, MSCI India has gained nearly 80% and MSCI EM jumped around 65%, in dollar terms. Global funds have been deploying high amounts leading to a record net inflow of foreign institutional investors (FII) of $9.55 billion in November with a net inflow of about $18 billion in Indian shares in 2020 so far.
“It is a nominal decline in India’s premium. One of the reasons is that India’s depressed earnings were upgraded after the September quarter. The other is that few of the constituents in the MSCI EM index have outperformed in the last few weeks, which increased valuations of the overall MSCI EM index,” said Deepak Jasani, retail research head, HDFC Securities Ltd.
At the beginning of FY21, India’s valuation premium over EMs was at 21.12% with MSCI India’s one-year forward PE at 13.33 times and that of MSCI EM at 11.09 times.
According to Hemang Jani, head of equity strategy, broking & distribution, Motilal Oswal Financial Services, the premium is likely to remain stable or increase over time, as India’s weightage has been increased by MSCI in their global EM index to 8.7% from 8.1% recently, which is expected to result in a passive flow of over $2.5 million.
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