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- IBEF
- January 27, 2022
Despite recent stock price corrections, the Indian equity market remains among the most expensive in the world. The Sensex is currently trading at a trailing price-to-earnings (P/E) multiple of 26.3x, about double that of MSCI Emerging Markets (13.9X) and nearly 40% higher than Dow Jones (19.1x). According to Bloomberg data, only the tech-heavy Nasdaq Composite is more expensive, with a P/E multiple of 116.6x.
When compared to other major Asian markets and developed European markets, India's stock value is likewise on the high side. For example, Indonesia's benchmark index is currently valued at 24.6 times its trailing earnings per share (EPS), while the Philippines' benchmark index is valued at 24 times its trailing earnings per share (EPS); Thailand's benchmark index is valued at around 15 times its trailing earnings per share (EPS).
Similarly, major Western European stock indices are currently trading with a price-to-earnings multiple that ranges from 14.6x for Germany's DAX to 20.8x for France's CAC40. When adjusted for underlying growth in corporate earnings in the respective markets, the equity valuation in India also appears to be expensive. While the Sensex's underlying growth earnings per share (EPS) is better than its peers in China, Malaysia, and the Philippines, earnings growth of other countries/regions such as Indonesia, Taiwan, South Korea, Brazil, Thailand, and Singapore have been much faster in the recent 12 months.
In industrialised countries, such as Japan and Western Europe, the recovery from the Covid-19 shock has been faster in emerging markets, such as India. For example, the Dow Jones Industrial Average EPS has increased by 48% in the last year, whereas corporate earnings in Japan have increased by 92.5% in dollar terms. Earnings growth has been even faster in European indices. The DAX's EPS has increased by 221% since January of last year, while the CAC40's EPS has increased by 207%. The underlying EPS of the Sensex (in US$ terms) has increased by 54.6% in the last 12 months, outpacing the MSCI Emerging Market index's growth of 52.8%. Given that the Sensex's P/E is approximately twice that of the MSCI EM, the Indian Market’s P/E-to-growth ratio is nearly 80% greater than the norm for developing markets.
The comparatively high valuation, according to analysts, increases the negative risk for Indian markets. “Given that the stock valuation in India remains on the higher side than most emerging and developed markets, our markets face a bigger downside risk from monetary tapering and interest rate hike by the US Federal Reserve,” says Dhananjay Sinha, MD and chief strategist JM Financial Institutional Equity.
Because foreign investors have reduced their exposure to developing markets as a result of the recent increase in interest rates in the United States and a halt in asset purchases by the Federal Reserve, many emerging markets have seen a correction. For example, since October 2021, international portfolio investors have been net sellers in India, causing the broader market to fall. Because of reasons such as increased crude oil costs and a drop in global liquidity, most emerging markets are seeing a slowdown in economic and corporate earnings growth.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.
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