India’s Market Valuation Gap Narrows but Still Expensive Compared to Emerging Market Averages

India’s stock market valuation has significantly converged with global benchmarks, yet it remains expensive relative to its historical average among emerging markets. The current price-to-earnings (P/E) ratio for India stands at 20.02x, compared to its pre-pandemic five-year average of 18.63x. In contrast, other emerging markets have largely returned to their historical valuation norms.

India’s Valuation Convergence with Global Markets

The valuation premium that India previously held over global markets has now shrunk to its lowest level since the pandemic. Despite this, Indian stocks continue to trade at a premium over other emerging markets by historical standards.

According to Bloomberg Consensus one-year forward earnings estimates, the MSCI India Index—the benchmark for most India-focused funds—is currently trading at 20.02x earnings, compared to 20.39x for the MSCI US Index. This marks a slight discount, considering that in December 2022, India’s P/E multiple was 3.36x higher than the US market.

Similarly, the valuation gap between the MSCI India Index and MSCI World Index has narrowed from 5.21x in December 2022 to 1.71x today. This realignment brings India’s valuation closer to its pre-pandemic five-year average differential of 0.48x (India vs. US) and 1.84x (India vs. World).

India’s Valuations Remain Expensive Compared to Emerging Markets

Despite this convergence with developed markets, India remains overvalued relative to the MSCI Emerging Markets Index. Currently, the MSCI India Index trades at 20.02x earnings, while the MSCI EM Index is at 12.18x, reflecting a valuation premium of 7.84x. Though this is lower than the peak differential of 10.56x in December 2021, when MSCI India was at 22.86x and MSCI EM at 12.80x, it remains above the pre-pandemic five-year average of 6.49x.

A key factor behind India’s high valuations is the post-pandemic surge in earnings, following years of sluggish growth. Additionally, the underperformance of Chinese equities has influenced investor sentiment, making India a relatively attractive investment destination.

China’s Market Recovery and Its Impact on India’s Valuation Premium

Chinese stocks have seen a major correction in P/E multiples since 2020, largely due to regulatory crackdowns, weak post-Covid recovery, and persistent property sector challenges. From 15.38x in 2020, China’s P/E ratio dropped to 9.04x in December 2023. However, as of 2024, Chinese stocks have rebounded to 11.47x, closer to their pre-pandemic five-year average of 11.88x.

Comparatively:

• The MSCI EM Index is now slightly above its pre-pandemic average (12.18x vs. 12.13x).
• China is slightly below its pre-pandemic average (11.47x vs. 11.88x).
• India is still trading at a 7% premium over its pre-pandemic levels.

Will Foreign Investors Return to Indian Markets?

India’s expensive valuations have often been cited as a deterrent for foreign institutional investors (FIIs). With stock prices seeing a correction, it remains to be seen whether lower valuations will entice foreign investors to reconsider their allocations to Indian equities.

As global markets continue to rebalance, India’s valuation trajectory will be closely watched by market participants. Investors looking at long-term opportunities in emerging markets must weigh India’s strong fundamentals against its premium valuations.