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MSCI India valuations more than double of MSCI Emerging Market Index

Over the past one year, MSCI India Index has gained around 5.80%, while MSCI EM Index has slumped around 14.50%, as of 31 August. (File Photo: AP)Premium
Over the past one year, MSCI India Index has gained around 5.80%, while MSCI EM Index has slumped around 14.50%, as of 31 August. (File Photo: AP)

  • The MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market. With 109 constituents as of 31 August, the index covers approximately 85% of the Indian equity universe.

NEW DELHI: Driven by rally in Indian stocks over the past one year, the valuation of the MSCI India Index, in price/earnings terms, is trading at a 134% premium to the MSCI Emerging Market (EM) index, which is above the historical average of 62%.

Data shows that the current 12-month forward P-E ratio of MSCI EM trades at around 10.57 times, while India index is at 24.83 times.

The MSCI India Index is designed to measure the performance of the large and mid-cap segments of the Indian market. With 109 constituents as of 31 August, the index covers approximately 85% of the Indian equity universe.

On the other hand, the MSCI Emerging Markets Index captures large and mid-cap representation across 24 EM countries.

Over the past one year, MSCI India Index has gained around 5.80%, while MSCI EM Index has slumped around 14.50%, as of 31 August.

Some experts are of the opinion that the premium valuation that India commands is justified.

"I don’t think we are doing a like-to-like comparison when you are comparing India to, let’s say, Brazil or Russia or South Africa. Because I think India has a very wide base of very high-quality companies across every sector. Obviously, India will trade at a premium to a predominantly commodity-driven market, which does not have high quality companies. Indian markets in terms of ownership, governance and transparency, are way ahead of many other emerging markets," Jiten Doshi, co-founder and chief investment officer of Enam AMC had told Mint earlier.

Doshi is of the opinion that India rightly deserves to be at a premium to these markets, given that most of the businesses here generate a very decent return on capital employed (ROCE).

However, there have been caution views on the markets as well.

According to a recent note by Incred Research Services Private Ltd, the June 2022 quarter Nifty-50 companies’ consensus Earnings Per Share (EPS) miss was around 4%. This was the first miss since September 2020, as peak raw material, and employee cost hit profitability.

Data show that India’s weightage in the MSCI EM Index has been on the rise over the past few years. India’s weightage in MSCI EM Index was 8.6% in May 2019, which increased to 14% as of July 2022.

“Despite the increased weight for India among MSCI emerging markets, the premium for India valuation scaling above +2SD (two standard deviations) above 10-year mean is a cause of concern, thereby demanding caution,“ it said in a note.

Apart from emerging markets, MSCI India Index also enjoys a premium over the US stocks.

Data show that the current 12-month forward P-E ratio of S&P 500 trades at 19.04 times against MSCI India Index’s of 24.83 times.

However, the data (see graph) suggests that historically the valuations of the both the markets equalize with either India correcting or US rallying.

Historically, the valuations of the both the markets equalise with either India correcting or US rallying.
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Historically, the valuations of the both the markets equalise with either India correcting or US rallying.

Further, according to Incred Research Services, MSCI India PE valuation is the highest among global MSCI peers, which is a cause of concern.

ABOUT THE AUTHOR

Abhinav Kaul

Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
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