The underperformance by the Indian equity markets in recent months has meant that domestic markets are trading at valuations below their long-period average (LPA) of 10 years. As the chart shows, developed economies such as the UK and the US trade at a significant premium. In fact, MSCI EM (emerging markets) and China, too, are trading at a premium. Prices mentioned in the chart are as on 30 April and the Indian market has dipped substantially since then, which means valuations have come off even more.
“There is a reallocation of funds to markets that are already performing well such as Brazil, Russia and China," says Hitesh Agarwal, head of research at Reliance Securities. “Moreover, considering Indian markets had already gone up substantially after the change of government, some kind of profit-booking is bound to happen."
The good news for India is that when market valuations are already below LPA, they will, once the panic settles, regain their attraction for investors.