Sharp rise in domestic equities brings India at par with EM peers

Latest rally brings 6-month performance of domestic equities at par with global peers

The sharp rise in domestic equities has helped India play catch-up with emerging market (EM) peers. The six-month return of the benchmark Nifty is now at par with the MSCI EM and MSCI Asia Pacific (excluding Japan) indices. 

The index of 50 blue-chip companies has rallied 7 per cent from 2019 lows, amid strong buying by global funds. Between last August and February this year, India was a major underperformer in the MSCI EM universe. 

Global headwinds and slowing growth weighed on all the markets. However, India’s woes got compounded due to domestic factors such as a liquidity crisis in the non-banking financial companies sector, following the IL&FS default; flare up in cross-border tensions; and political uncertainty ahead of the elections. 

“India’s relative outperformance and premium vis-à-vis other EMs has narrowed since the beginning of 2019. Escalating (cross-border) tension added to the macro risks in the form of impending general elections, which were anyway becoming part of the investor’s decision-making process. As a result — and partly due to the existing premium — Indian equity markets did not get the full advantage of a dovish Fed,” said Rahul Singh, chief investment officer, equities, Tata Mutual Fund.

The underperformance, however, led to narrowing in India’s valuation premium, prompting overseas investors to once again look at domestic equities aggressively, said experts.

Currently, Nifty’s price-to-earnings is 48 per cent higher than that of the MSCI EM index and 16 per cent more than the MSCI World index. In August 2018, the premium to the EM and the World indices had shot up to 70 per cent and 25 per cent, respectively. “Value has started to emerge in India,” said Herald van der Linde, head of equity strategy, Asia Pacific, HBSC. Earnings growth and return on equity (RoE) look better in India, he added.

Illustration by Ajay Mohanty

HSBC recently upgraded its stance on the Indian market from “neutral” to “overweight”. It has an “overweight” stance on other regional peers, Philippines, China and Singapore. 

Most EMs have witnessed improvement in foreign flows after the US Federal Reserve decided to put interest rate hike on hold at its meeting on January 30. After the latest spurt, India’s performance could now converge with other EMs, believe experts.

“Excessive relative valuation is no longer a major concern. The Nifty itself isn’t much more attractive than regional peers. Therefore, India continues to be rated neutral in our Asia, ex-Japan, model portfolio,” said Abhiram Eleswarapu, head of India equity research at BNP Paribas India, in a note last week.

While India’s valuation premium has narrowed, it still above the long-term averages. India’s 10-year average premium to MSCI EM index is 39 per cent and to MSCI World index is 11 per cent. 

Analysts believe the premium could normalise earnings growth expectations for the next financial year are met. Most analysts are forecasting corporate earnings to grow 20 per cent in 2019-20.