After a strong rally through the first 9 months of the year, Indian equities have stumbled recently. Over the past 3 months, the MSCI India index has declined 2.7% in USD terms, underperforming both MSCI China (+22.5%) and MSCI Emerging Markets (+5.1%). In Indian rupee terms, the Nifty 50 index has declined 7% from its September peak, following a 21% year-to-date surge. Given this backdrop, should investors view this as a buying opportunity, or is caution still warranted?
India offers compelling structural advantages for investors, underpinning its long-term bullish case. A high savings rate, among the world’s highest, continues to be supported by favorable demographics and urbanization, thus further strengthening domestic investment while reducing reliance on volatile capital flows. Indian household savings, currently around $650 billion, is projected to grow to $1.1 trillion (+69%) in 5 years and $1.7 trillion (+260%) by 2035. With about 70% of household assets invested in property and/or gold, and only around 6% of assets invested in equities compared to 40%-45% in the U.S., the potential for future equity inflows is promising. From a geopolitical standpoint, India is likely to remain relatively insulated from a Trump trade war. The U.S. will likely continue to court India as a key Asian ally in its rivalry with China, providing a favorable environment in attracting foreign investment and boosting manufacturing growth.
However, near-term challenges outweigh these positives. Valuations remain stretched, with MSCI India currently at 22.7x P/E, above its 10-year average of 19.1x and pre-Covid average of 17.6x. GDP growth has notably slowed as of late, registering its weakest growth in almost 2 years in the previous quarter. This has flowed through to weaker corporate earnings, with MSCI India 3Q profits missing consensus expectations by an average of 4 percentage points. Forward-looking indicators, such as weakening household confidence and declining credit growth, suggest further economic headwinds. Rising food prices have resulted in stickier inflation, constraining the Reserve Bank of India from easing monetary policy. Given these factors, potential downsides outweigh immediate upside opportunities. In conclusion, while Indian equities are underpinned by compelling structural drivers, high valuations and economic challenges warrant investor caution in the near term. A more pronounced market correction or improvement in macroeconomic fundamentals might provide better entry points. For now, staying patient may be the most prudent strategy.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 623 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe. With 429 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.
