India’s valuation premium compared with other emerging markets is justified, despite the recent stock market slowdown, more lacklustre economic growth and foreign investor outflows, according to Eastspring Investments.
“India’s valuation premium can be justified if one considers a few factors. A key point is that India’s return on equity (ROE) is amongst the highest. India also ranks second worldwide, just behind the US, in the number of companies that have consistently achieved a ROE exceeding 20% for over a decade,” Eastspring said.
“Indian markets remain firmly underpinned by domestic inflows. The continued strong demand for Indian equities by institutional investors and retail investors are soaking up the outflow of foreign capital. This should continue to provide support for India’s equity market.”
India’s equities markets have been on a tremendous bull run since the pandemic, with the blue-chip NSE Nifty 50 climbing over 200% since March 2020, although more recently its performance has dipped with October last year being its worst performing month since March 2020 as it fell more than 5%.
Eastspring noted that despite the recent pessimism, there are reasons to be optimistic. With regards to its economic growth, with the economy now projected to grow by 6.4% in the financial year ending March 2025, its slowest rate in five years, Eastspring noted that no other economy of a comparable size could boast this level of growth.
It also noted that its 2025-2026 budget had put the country on a stable footing for sustainable growth with it incentivising job creation, while the tax savings would also help boost domestic consumption.
It noted that this has coincided with a more accommodative monetary policy stance from the Reserve Bank of India, which cut its key repo rate by 25bp, its first cut in nearly five years.
It also argued that India benefited from political stability and was becoming an attractive destination for rerouting of supply chains.
Eastspring conceded that recent trends in earnings had been more concerning as the first and second quarters of financial year 2025 had seen some deceleration, although it noted that the third quarter was more mixed. Out of the 242 companies to report, better earnings were seen in the financial year, while in other sectors, quarter-on-quarter their performance had improved if not year on year.
Finally, Eastspring concluded that the depth of India’s capital markets meant that it lent itself to active management.
