D-Street's valuation premium at record high vs peers

The valuation premium of Indian equities over emerging and developed markets hit a record high in August, Bloomberg data show. The MSCI India index—a benchmark for global fund managers to assess the country’s investment performance—now has a valuation premium of 96% and 39% over the MSCI Emerging Markets and the MSCI World indices, respectively. Over the long term, India has traded at 45% and 8% premium to the EM and DM markets.

1. P/E PREMIUM
a. Over emerging markets

b. Over developed markets

2. OUTPERFORMANCE
YTD basis (indexed to 100)

3. PRICE-EARNINGS MULTIPLE

4. KEY DRIVERS
FPI flows FPIs turned net buyers in the second half of July and deployed $5.7 billion in August so far, the highest in 20 months

Relative outperformance
India’s dollar market capitalisation is down 1.4% this calendar year against a 14% drop in global market capitalisation.

5. WHAT IT MEANS

• Foreign flows drove PE expansion as 12-month consensus earnings per share (EPS) estimate fell 2% after June quarter results

• This is the second quarter in a row consensus EPS is declining

• Spread between earnings yield (inverse of P/E) and bond yield over 200 basis points against long-term average of 100 basis points

• Markets at risk of a sharp correction in case of adverse events

• Gains may be limited going ahead

• May weigh on incremental foreign flows in the near term unless earnings growth improves