Market watch: India’s equity valuations dip below long-term averages; but stay elevated versus peers

India’s equity valuations are trading marginally below their historical averages but continue to remain expensive compared with regional peers, raising concerns amid slowing earnings growth.

The benchmark Nifty currently trades at a price-to-earnings (PE) ratio of 21.97 times, lower than its five- and 10-year averages of 24.4 and 24.8, respectively. In contrast, Hong Kong’s Hang Seng is at 11.7, South Korea’s Kospi below 13, and South Africa at around 12.7, according to an ET report.

Valuations in India have traditionally traded at a premium to peers, supported by strong growth prospects. However, with corporate earnings momentum weakening, foreign investors are paring exposure and holding back fresh allocations.

“Valuations have begun mattering now because nominal GDP growth has slipped into single digits compared to around 12-13%,” said Ritesh Jain, founder of Pinetree Macro, a global macro asset allocation fund. “Corporate profitability is a function of nominal GDP. So, for an overseas fund manager looking at various markets, a country with slowing nominal growth and rich valuations is far less appealing despite its inherent strengths.”

India is now the second-most expensive major market after the US, with some global fund managers increasingly shifting allocations to cheaper Chinese, European, and Japanese equities.

Fund managers also noted that index composition plays a key role in valuation levels. “The composition of Indian indices must be taken into account while looking at valuations,” said Nilesh Shah, managing director, Kotak Mutual Fund. “If the Sensex and Nifty are full of expensive consumer names and there are fewer commodity players, it’s bound to push up valuation levels. If we were to remove some of the consumer names, our valuations are around averages on a historical basis.”