India equities continue to trade at 30% premium over other EM peers

Published: May 14, 2020 3:50:22 AM

The premium of the Indian market had earlier declined because of the panic selling by foreign exchange-traded funds (ETFs), which led to an exodus of foreign flows.

Both the benchmarks — Sensex and Nifty — have gained 23% since their March 23 lows.Both the benchmarks — Sensex and Nifty — have gained 23% since their March 23 lows.

By Urvashi Valecha

Despite the sharp correction in March and economic uncertainties from lockdown, Indian equities continue to trade at a 30% premium over other emerging markets (EMs). Even as Indian markets have continued to maintain a sizable premium over other EMs, experts are of the view that the premium may come down in the near-term.
Indian equities have historically commanded a premium of 40% over other EMs, but the extent of it reduced after a global sell-off, which started towards the end of February due to Covid-19. However, in April, stock markets witnessed a pull back rally on the basis of upward movement of certain heavyweight stocks such as RIL, HDFC Bank and Infosys. Both the benchmarks — Sensex and Nifty — have gained 23% since their March 23 lows.

While the equity markets have recovered, it might come down again in the near term. The economic pain caused by the lockdown and the forecasts of bleak growth suggest that there would be a decline in the Indian equity markets. Piyush Garg, chief investment officer, ICICI Securities, said, “Premium of the Indian market is one aspect of the equity market. If the domestic economy going ahead does not do very well, then the premium is likely to come down as we may see a number of domestic issues prop up in the next six months.”

It is noteworthy that the Nifty and Sensex currently trade at a one-year forward PE of 15.64 times and 16.42 times, marginally higher than the historical ten-year average PE of 15.52 times and 15.79 times. The only other EM which has a higher one-year forward PE than Nifty is Taiwan’s Taiex which trades at a one-year forward PE of 15.82 times. Even though the premium may come down, it is unlikely that it would fall below other EMs. Rusmik Oza, executive V-P, head of fundamental research, Kotak Securities, said, “It is not possible for India’s premium to go below other EMs for a long time since it is better placed on most parameters. If one considers the MSCI EM index, nearly a third of it comprises of China. Historically, China has traded at a one-year forward PE of 10 times due to the opacity in financials.” China’s Shanghai Composite currently trades at a forward PE of 11.11 times and its ten-year historical average PE is 11.07 times.

The premium of the Indian market had earlier declined because of the panic selling by foreign exchange-traded funds (ETFs), which led to an exodus of foreign flows.

FPIs pulled out $8.3 billion in March and $30.5 million in April from the Indian equity markets, impacting Nifty and Sensex valuations. Sachin Shah, fund manager, Emkay Investment Managers, said, “It cannot be ruled out that the premium of the Indian markets may decrease going ahead, but the fundamental factors of the market will not change, and even if the premium decreases, it will be a blip and not an entire structural change.” EMs such as Hong Kong, South Korea, Indonesia and Brazil are trading at a one-year forward PE of 10.5-12.7 times.

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