By Francisco Gonzalez, an ESG analyst at Alquity
Following a difficult 2025, Indian equities have been a laggard again this year. In dollar terms, the country’s equity market is down roughly 8% year-to-date, while AI-driven markets like Korea and Taiwan have surged 70% and 86% respectively, pulling the broader Emerging Markets index up 23%. Yet this weaker market performance contrasts with an increasingly resilient economic and corporate backdrop in India.
India’s fundamentals remain strong
The market weakness has been driven largely by the US-Iran conflict and concerns over economic growth, which triggered significant foreign equity outflows in Q1, coupled with the attractiveness of the AI trade, leaving almost 80% of EM managers underweight India.
However, beneath the market noise, India’s macroeconomic and corporate fundamentals have strengthened this year. The disconnect between market sentiment and the underlying economy is reflected in bank credit growing at its fastest pace since May 2024, while second-quarter GDP growth came in at 7.8%, well ahead of expectations.
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Among Indian corporates, 48% of companies beat estimates in Q2, while net profit growth, excluding oil marketing companies, was over 20% during the quarter. Despite that, and India trading at a discount to its 10-year average, the comment we hear most often remains: “India looks particularly expensive.”
Putting valuations into context
The reality, however, is that over the last 30 years, Indian equities have rarely looked “cheap” in the way some European or broader Asian markets have at times. And while past performance is no guide to future returns, India’s historically ‘high’ valuations have not prevented investors from generating strong absolute returns over the long term.
Just as a one- or two-year forward P/E can make a highly cyclical company look deceptively cheap at peak or near-peak earnings, it also struggles to capture the longevity of the structural growth that India (and particularly small- and mid-caps) is riding on. Valuation remains important, but so does the duration of the growth investors are paying for. India has progressed enormously, yet its development trajectory still has decades to run.
Moreover, India’s valuation must be viewed through the lens of capital efficiency too. India boasts a significantly higher return on equity than most Emerging Market peers (ranking behind the US) meaning that earnings are not only durable but are also being reinvested at structurally high rates of return.
Where we see long-term growth
This combination, we believe, is important when assessing what investors are actually paying for. One example of India’s growth potential is housing. There is an estimated housing shortage of 62.5 million units, and household size remains high (currently 4.4 members, in contrast to 2.4 in the UK). This is driven largely by economic necessity rather than just cultural tradition – with the number steadily declining as India develops further: amplifying the shortage.
Secondly, more than 100 million households are also expected to move into the upper-middle- and high-income cohorts over the course of the decade. As prosperity and living standards rise, Indians are likely to save and invest more through digital brokers, while also spending more on discretionary goods and services; from branded clothing and eating out to travel.
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The travel opportunity is particularly interesting in the digital era. Social media platforms has broadened the desire to travel, while digital booking has made travel easier and improved price discovery. At the same time, the country is undergoing a significant expansion of transport infrastructure. In fact, the number of Indians flying has increased by more than 80 million since pre-Covid levels.
A final example is air conditioning – despite India’s hot weather, air conditioning ownership nationally stands at just 3% (with less-developed states such as Bihar being even lower). One of the key reasons for such low penetration is electricity availability – in Bihar, over the past decade, it has risen from around 12 hours a day a decade ago to 20-22 hours now, unlocking demand for air conditioning and other white goods.
These are the secular growth trends we aim to invest in and the underlying drivers of our portfolio. We look beyond the index for companies exposed to those themes – whether it’s through online travel agencies or hotels, PVC pipe manufacturers, electrical transformer producers or fintechs. Our focus is on well-managed, entrepreneurial companies that can compound alongside India’s long-term structural growth.
