Year-to-date (YTD) India’s main index Nifty50 is down by -0.9%. Other EMs like Mexico, South Africa, South Korea, and China are up by 9.1%, 9.0%, 10.7%, and 5.2%, respectively.
Not only that, the developed states have also done better. S&PP500, Nasdaq, France, UK, and Germany have provided returns of 6.3%, 13.1%, 12.1%, 6.7%, and 10.4%, respectively. The downfall effect of India is much higher in Mid & Smallcaps. Nifty500 index is down by -13.3%, and more than 50% of the stocks are trading below the 200-day moving average.
First off, kindly take notice that the decline in India’s stock market in 2023, following the strong performance from 2020 until the middle of 2022, is neither a surprise nor unanticipated. India outperformed the rest of the world markets during the pre-and post-pandemic periods. What we are undergoing today is the overhang of acute overrunning for a period of two years.
Furthermore, other economies are anticipating a reversal in economic growth and valuation. The domestic stock market needs a breather and has to settle down in valuation. This underperformance is expected to continue in 2023. This is because India continues to trade at a high premium to the world market.
MSCI-India price-to-earnings ratio valuation is 34% superior to MSCI-World, 106% to MSCI-China and 95% to MSCI-EMs. Historically, India has been trading at an average premium of 10% to the world in the last 10 years. Currently, it is 24% above the long-term rate. Similarly, compared to the MSCI-China and MSCI-EM, it is at 43% and 27% above the long-term average, respectively.
At the same time, we should also note that India has a habit of trading at premium valuation being the fastest growing and most transformative country in the world. However, the premium is on the higher side on a short to medium-term basis and will settle down. Importantly, the premium valuation of India is expected to stay strong and high in the decade. However, it is challenging to state how much will the premium be but we can safely presume that its future premium can be better compared to the last 10-year average unless it undergoes a change in economic and political stances.
A reassuring factor is that the extent of the drop in valuation and its impact on the market should be limited. Because the normalisation of the analogy will happen when other markets perform better in absolute terms compared to India.To forecast how much will be the further valuation consolidation in 2023 is a difficult task. However, on a long-term basis, assuming, as mentioned, that the future valuation of India will be better than the historical premium of 10% to 15%, the valuation can moderate to 19x. Currently, we are trading at a 34% premium with a valuation of 22x. The fall in price will be protected by the earnings growth forecast at 10% in FY24.
Today, India’s key challenges are selling from FIIs, a high-interest rate, elevated inflation, and slowing earnings growth. We feel that most of the issues are getting factored into the prices. If the cautiousness continues in the short-term, we can presume that the worst is over, limiting further price corrections though valuation moderate.
(Vinod Nair, Head of Research at Geojit Financial Services)