Just two years ago, the MSCI India reached a historic cyclically adjusted price-to-earnings (CAPE) ratio of more than 41x, according to data from Barclays, more expensive than the S&P 500.
This put Indian equity valuations near the top of their historical range, beaten only by the height of the global financial crisis.
High valuations contributed to the MSCI India being one of the worst performing markets in the shorter term, down 11.5% over the past 12 months, while most other markets surged.
Avinash Vazirani and Colin Croft, managers on the Jupiter Indian Equity team, noted there was an “honest” argument Indian equities were overvalued, even after valuations have slid in recent months.
“The MSCI India index trades at around 22x trailing earnings against MSCI EM at around 17x, a 30% plus premium that has kept generalist EM allocators away,” the team conceded.
However, Sandip Patodia, manager of the JP Morgan India Growth and Income trust, argued this was not a problem that was exclusive to India. Indeed, according to Barclays data, markets such as the US, Taiwan and Korea are approaching the top of their historical ranges.
India had come off a cyclical high, where up until about September 2024 it had done very well and people “were not talking about valuations”, because they tend to allocate based on recent results, he noted. “People said this is the fastest-growing market globally, and this is where to allocate capital.”
However, coming off this cyclical high meant that quite a lot of negative sentiment has already been “priced in” to the Indian market, so there’s not a lot of risk in valuations that investors do not already know about, he argued.
Investors have missed this because they assumed the recent downturn in Indian equities was a structural decline, rather than a cyclical downturn, he added.
“Contextually, are global markets generally overvalued? Yes, I don’t think the valuations on really any equity market make sense. But on a relative basis, I don’t think India is overvalued.”
See also: Why India’s long-term growth story remains intact
In fact, the fundamentals of the Indian market still seem very compelling, according to Patodia.
“What other country offers you the kind of long-term growth prospects of India, and has the geopolitical strength it has when two global powers have been fighting for hegemony?”
He said the recent tense geopolitics has made defending supply chains more important, and India is well positioned to benefit due to the lower manufacturing costs in the region.
As an example, Patodia pointed to Korean companies such as Hyundai or Hynix, which have started outsourcing manufacturing to the region and improving the long-term job prospects.
The Jupiter equity team agreed the fundamentals seemed broadly supportive.
For example, Indian corporates have a five-year return on equity of 15%, which is closer to what European and developed markets generate, and its three-year profit margins are a match for the S&P 500, they noted.
“In short, India has the growth, the profitability, the margins, and the balance sheet quality. The rest of EM, outside the AI complex, increasingly does not.”
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Rob Marshall-Lee, CIO and emerging market equity manager at Cusana Capital, argued this fundamental quality means the overvaluation argument has almost disappeared in India. In fact, the quality in India was good enough that many businesses in India may be worth the higher asking price.
“Mathematically, I think if you’re buying a good business, with very high sustained growth and return on capital, you probably should be paying a higher multiple for it.”
India has plenty of well-run businesses creating value over time which justify the relative asking price, but emerging market allocators are missing out because they are chasing “whatever is hot right now,” Marshall-Lee said.
As an example, he pointed to Varun Beverages, an Indian drinks bottler responsible for brands such as Pepsi and Mountain Dew, which currently trades on a 58x price-to-earnings ratio, according to Google Finance data.
However, Marshall-Lee argued the business was positioned to benefit from domestic and structural tailwinds.
India is a “hot country getting hotter,” stimulating demand for Varun’s carbonated beverages, which are currently very cheap, with lots of sales left to achieve in a market where it is essentially a duopoly.
This makes it seem a solid investment, according to Marshall-Lee, despite shares sliding in recent months.
“They’ve got strong brands, they’ve got the distribution, and they’ve got the undemanding pricing; it’s the type of business that can keep compounding at 20% per annum.”
