India underperforms Asian peers after six weeks; Nifty ends 1.23% down

Nifty has outperformed MSCI APAC index for 21 of the 26 weeks since May

Asian peers have managed to catch up on some underperformance vis-à-vis Indian equities. The benchmark Nifty ended the week with a 1.23 per cent loss, while the MSCI Asia Pacific Index rose close to a per cent. This was India’s first weekly underperformance to the Asian market gauge in six weeks. Notably, the Nifty has outperformed the MSCI Asia Pacific index in 21 out of 26 weeks since May.

The underperformance—although not very stark—comes amid concerns over domestic valuations relative to Asian peers.

In a note earlier this week, global brokerage UBS said the Indian market had turned “unattractive” due to ''extremely expensive” valuations relative to the ASEAN countries.

“In our framework, Taiwan, Australia and India look unattractive, especially on valuations/ earnings and ASEAN generally looks positive,” said UBS Strategist led by Niall MacLeod in their APAC Equity Strategy note on Wednesday.

UBS is currently overweight on Indonesia, Philippines, Singapore, Malaysia and China (upgraded from underweight to overweight).—markets that have underperformed India this year.

The MSCI Asia Pacific index clocked positive returns during the week amid easing of concerns in China.

China Evergrande Group pulled back from the brink of default by paying a bond coupon before this weekend’s deadline. The move stoked a rally in Chinese and Hong Kong real estate stocks.

The payment “brings some near-term reprieve ahead of its official default deadline and presents a more positive scenario than what many will have expected,” said Jun Rong Yeap, a market strategist at IG Asia Pte, told Bloomberg.

Meanwhile, the Sensex and the Nifty fell for a fourth straight day on Friday. The Sensex ended 108 points, or 0.2 per cent lower at 60,815. The Nifty 50 index fell 0.35 per cent, or 63 points to end at 18,115. The mid- and small-cap indices saw a deeper cut during the week of as much as 6 per cent.

This week's fall comes amid concerns over high valuations and the impact of inflation on corporate profits. The surge in oil prices is seen as a negative for Indian equities as it hurts the country’s macros. But is seen as a positive for oil exporting countries or those less dependent on oil. Besides, the rising bond yields both domestically as well as in the US has altered the risk-reward for equity investors.

Despite this week's underperformance, India is still by far the best-performing major market in Asia. The Nifty is up 29 per cent year-to-date. The MSCI Asia Pacific (excluding Japan) index—which is dominated by stocks listed China and Hong Kong—is down 2 per cent YTD.

India’s strong showing this year is on account of faster ramp up in vaccination programme and hopes of a strong recovery in the economy and corporate earnings.

However, India’s valuation premium to Asian and emerging market peers has expanded at record levels of 90 per cent versus 10-year average of 43 per cent, prompting some global funds to rethink their allocation strategies.

-- with Bloomberg inputs