India’s Valuation Gap Narrows but Remains Costly vs. EM Averages

India’s P/E Ratio Nears Global Benchmarks but Retains Premium Over Emerging Markets

India’s stock market valuations have gradually aligned with global markets, narrowing the gap that widened significantly post-pandemic. However, compared to historical benchmarks for emerging markets, Indian equities remain expensive.

According to Bloomberg Consensus one-year forward earnings estimates, the MSCI India Index—the benchmark for most India-focused funds—is currently trading at a P/E multiple of 20.02x, compared to the MSCI US Index at 20.39x, signaling a marginal discount. This is a notable shift, as the valuation differential between India and the US was 3.36x in December 2022.

Similarly, the P/E differential between MSCI India and the MSCI World Index, which was 5.21x in December 2022, has now narrowed to 1.71x—more or less aligning with the pre-pandemic five-year average of 0.48 (India vs. US) and 1.84 (India vs. World).

Despite this progress, India still trades at a significant premium compared to other emerging markets (EMs) by historical standards.

India vs. Emerging Markets: Valuation Premium Persists

While India’s relative valuation gap with developed markets has narrowed, its premium over other emerging markets remains elevated.

• MSCI India P/E: 20.02x
• MSCI Emerging Markets (MSCI EM) P/E: 12.18x
• Valuation premium over MSCI EM: 7.84x

Though this premium has declined from its peak of 10.56x in December 2021, it is still above the pre-pandemic five-year average (2015-2020) of 6.49x.

The high valuation of Indian equities compared to global emerging markets can be attributed to:

1. Post-pandemic earnings growth: Indian corporate earnings rebounded sharply from pre-pandemic lows.
2. Rising stock prices: India’s stock market outperformed many global peers, pushing valuations higher.
3. Depressed valuations in Chinese equities: A steep decline in Chinese stock prices since 2020 has contributed to India’s valuation premium.

China’s Stock Market Rebounds, Narrowing India’s Relative Valuation Edge

The valuation disparity between India and China has been particularly stark in recent years. Chinese equities saw a sharp contraction in P/E multiples from 15.38x in 2020 to 9.04x in December 2023, driven by:

• Xi Jinping’s anti-business policies
• A sluggish post-Covid recovery
• Property market turmoil weighing on sentiment

However, in 2024, Chinese stock valuations have partially recovered to 11.47x, approaching their pre-pandemic five-year average of 11.88x (2015-2020).

Comparison of Current P/E Ratios vs. Pre-Pandemic Averages

Notably, while China’s market is now trading slightly below its pre-pandemic valuation levels, India’s P/E ratio remains about 7% above its historical average.

High Valuations Deter Foreign Investors from Indian Markets

The sustained premium in Indian equity valuations has been a key factor in limiting foreign institutional investor (FII) inflows.

• Foreign investors have been reluctant to invest in India due to its high valuation multiples.
• As stock prices correct, India’s premium could shrink, potentially making it attractive to global funds.

While India’s earnings growth remains strong, market experts believe that for FIIs to increase allocations, valuations may need to further align with emerging market averages.

Factors That Could Influence FII Interest in India

• Continued earnings growth supporting valuations
• Corrections in stock prices making India more attractive
• Global risk appetite for EMs improving
• Stabilization in China’s economy reducing India’s relative premium

Will India’s Valuations Normalize?

While India’s valuation premium has narrowed against the US and World indices, its historical overvaluation against emerging markets persists.

• If corporate earnings sustain growth, high valuations may be justified.
• If stock prices correct further, foreign investors may revisit India allocations.
• A rebound in Chinese equities could pressure India’s premium further.

As global markets adjust post-pandemic, India’s relative attractiveness will depend on both domestic growth prospects and global investor sentiment.