The surge in China equities and declines made by Indian markets in the past few months has narrowed the valuation premium between the two countries.
India’s valuation premium over Chinese equities has shrunk to about one standard deviation (SD) below the historical average.
“The 12-month forward PE trend shows a decline from levels above +2 SD in early 2021 to the current range, reflecting a relative de-rating. Despite this narrowing, India maintains a valuation premium over China, potentially supported by stronger fundamentals and higher investor confidence,” said a note by YES Securities.
Positive signs
As global investors move away from China due to geopolitical risks, India is set to capture more capital, driven by its stable economic environment, growing digital economy, and entrepreneurial ecosystem, said experts.
Siddharth Mehta, Founder & CIO, Bay Capital, said: “While China’s valuations may appear attractive, its long-term uncertainty makes India a more compelling choice. India’s youthful population, rapid digital adoption, and thriving entrepreneurial ecosystem make it an exceptionally strong long-term investment destination.”
The valuation premium of developed markets (DM) over EMs has retraced from a peak above +2 SD to below +1 SD and is moving closer to average. This retracement could reflect a reallocation of capital, potentially influenced by shifting global economic conditions, the brokerage said.
“Earnings growth is turning relatively more favourable for the EM basket, justifying the narrowing of valuation differentials with DM. Year-over-year profit growth for EM has improved over the last 9 months and is likely to outpace DM profit growth in the forthcoming quarter. This may support a re-rating of EM relative to DM,” it said.
Indian equities posted sharp gains on Tuesday on positive global cues. The anticipated rebound in domestic earnings, along with a recent decline in the dollar index and lower crude prices, is expected to support this recovery. FII outflows, tariff uncertainties and China play will keep investors cautious, said analysts.