# Indian Equities: Expensive, but underpinned by domestic growth Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2018-01-30 Category: INVESTING Category URL: https://financedigest.com/category/investing Meta Title: Is the Indian Equity Market Overvalued? Expert Analysis by Meta Description: Explore the recent surge in the Indian equity market and how structural reforms are shaping the future, with insights from Investment Manager Jaisal Pastakia. URL: https://financedigest.com/indian-equities-expensive-but-underpinned-by-domestic-growthhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/fd300118-9-1736843034592-compressed.jpg) **Jaisal Pastakia**, Investment Manager at Heartwood Investment Management The Indian equity market is now trading at an all-time peak in local currency terms and questions arise as to whether this market is fully valued. In sterling terms, the MSCI India gained 49% in the two years ended 31st December, 2017. This strong performance has been all the more notable as [Prime Minister](https://www.financedigest.com/factbox-who-will-replace-uk-prime-minister-boris-johnson.html "Factbox-Who will replace UK Prime Minister Boris Johnson?") Modi’s government implemented demonetisation measures in November 2016, as part of broader efforts to curtail the shadow economy. While recognising that equity [market valuations](https://www.financedigest.com/emission-control-catalyst-market-is-projected-to-rise-at-above-10-cagr-surpassing-the-market-valuation-of-us-20-06-bn-during-the-forecast-period-2021-2031.html "Emission Control Catalyst Market is projected to rise at above 10% CAGR, surpassing the market valuation of US$ 20.06 Bn during the forecast period 2021-2031") have moved appreciably higher, we nevertheless continue to take a positive view on India based on the country’s compelling domestic growth prospects. Some [market estimates suggest that India’s nominal GDP growth](https://www.financedigest.com/recycled-glass-market-estimated-to-experience-a-hike-in-growth-by-2019-2027.html "Recycled Glass Market Estimated to Experience a Hike in Growth by 2019-2027") could double by the next decade, resulting from two forces: India’s demographic advantage and structural economic reforms. India’s demographic advantage comes from it being one of the few large economies where the working age [population growth](https://www.financedigest.com/uraemia-treatment-market-is-expected-to-register-significant-growth-due-to-increasing-diabetic-population.html "Uraemia Treatment Market Is Expected To Register Significant Growth Due To Increasing Diabetic Population") is still positive. This trend, combined with a growing and aspirational middle- class population, bodes well for lifting future [productivity rates and boosting consumption](https://www.financedigest.com/organic-milk-powder-market-regional-industry-segmentation-analysis-by-production-consumption-revenue-and-growth-rate-by-2027.html "Organic Milk Powder Market Regional Industry Segmentation, Analysis by Production, Consumption, Revenue and Growth Rate by 2027"). However, stronger and [higher quality growth](https://www.financedigest.com/short-bowel-syndrome-market-higher-growth-rate-forecast-2020-2030.html "Short Bowel Syndrome Market Higher Growth Rate & Forecast 2020 – 2030") will only be secured through meaningful structural reform to India’s economy. **India’s reform agenda outpaces other EM countries** In this regard, Modi’s government’s commitment to the reform agenda has been particularly encouraging, especially relative to other major [emerging market](https://www.financedigest.com/investment-potential-in-emerging-markets.html "Investment potential in emerging markets") (EM) countries. Brazil remains a constant source of frustration for investors due to a troubled political scene and ongoing corruption investigations. [South Korea](https://www.financedigest.com/biden-arrives-in-south-korea-for-talks-with-president-yoon.html "Biden arrives in South Korea for talks with President Yoon") and China are making headway with implementing reforms, but the longer-term positive impacts remain to be seen. Arguably, given the sensitivity of [market sentiment](https://www.financedigest.com/dollar-weakens-after-gains-all-week-debt-deal-hopes-boost-market-sentiment.html "Dollar weakens after gains all week; debt deal hopes boost market sentiment") to high frequency data in China, the Chinese authorities may be deliberately slowing the pace of reform. India’s government, by contrast, has already implemented wide-ranging reforms (fiscal, land, [labour market](https://www.financedigest.com/spains-labour-market-resilient-as-unemployment-drops-in-nov.html "Spain’s labour market resilient as unemployment drops in Nov") and transport), which are helping to formalise the economy. The most impactful measures have been the goods and services tax and regulations to promote greater financial inclusion. The goods and services tax, which was introduced in July 2017, effectively creates a pan-Indian common market through the harmonisation of state and [central government](https://www.financedigest.com/lights-off-heat-down-central-europe-governments-save-power-to-set-example.html "Lights off, heat down: central Europe governments save power to set example") taxes. [Changes to the tax regime are expected to lead](https://www.financedigest.com/how-to-lead-organizational-change.html "How to Lead Organizational Change") to a meaningful pick-up in growth, as well as efficiency gains in areas like logistics. Elsewhere, reforms to promote greater financial inclusion [across](https://www.financedigest.com/open-finance-can-help-unlock-innovation-across-the-financial-ecosystem.html "Open Finance can help unlock innovation across the financial ecosystem") the population include demonetisation, subsidy reductions and measures to stop banking exclusion. One [important consequence of these reforms is the growing participation of domestic investors in the Indian equity market](https://www.financedigest.com/plaque-disclosing-aids-market-important-changes-in-industry-dynamics-during-2022-2028.html "Plaque Disclosing Aids Market Important Changes in Industry Dynamics during 2022-2028"). Domestic flows into equity mutual funds have seen a sharp increase since mid-2016 and the value of monthly systematic [investment plans](https://www.financedigest.com/conocophillips-plans-1-1-billion-investment-as-norway-oil-sector-heats-up.html "ConocoPhillips plans .1 billion investment as Norway oil sector heats up") (i.e. Indian [mutual fund](https://www.financedigest.com/mutual-funds-vs-stocks-which-is-better.html "mutual fund") schemes) have increased by two-thirds over that same period. A growing [savings culture has also been fostered by regulations to reduce the attractiveness of investing](https://www.financedigest.com/the-benefits-of-compound-interest-in-savings-and-investments-unlocking-financial-growth.html "The Benefits of Compound Interest in Savings and Investments: Unlocking Financial Growth") in physical assets. Domestic [liquidity trends](https://www.financedigest.com/liquid-cold-plates-market-comprehensive-shares-historical-trends-and-forecast-by-2028.html "Liquid Cold Plates Market Comprehensive Shares, Historical Trends And Forecast By 2028"), therefore, should remain a significant underpin to demand for Indian equities. Over the [near term](https://www.financedigest.com/automotive-glass-market-to-witness-sales-slump-in-near-term-due-to-covid-19-long-term-outlook-remains-positive.html "Automotive Glass Market to Witness Sales Slump in Near Term Due to COVID-19; Long-term Outlook Remains Positive"), the cyclical economic outlook is also showing signs of improvement. [Services activity](https://www.financedigest.com/euro-zone-april-business-activity-grows-on-strong-services-demand-pmi.html "Euro zone April business activity grows on strong services demand – PMI") and manufacturing output have seen meaningful increases since the end of last year. Actual [activity data](https://www.financedigest.com/oil-slips-on-china-covid-curbs-weak-factory-activity-data.html "Oil slips on China COVID curbs, weak factory activity data") in the business and consumer sectors further corroborates the upturn in sentiment surveys, with industrial production output, credit flows and car sales seeing strong improvements since late 2017. Inflation trends remain contained, but a significantly [higher oil price](https://www.financedigest.com/wall-street-set-to-open-higher-oil-prices-extend-losses.html "Wall Street set to open higher, oil prices extend losses") from here (India imports more than 80% of its oil requirements) could present challenges for the economy as well as fiscal and monetary policy, dampening investor sentiment. **Are valuations a barrier to further upside?** Overall, the investment case remains well supported by the domestic growth outlook, but investors should be mindful of a significantly higher [oil price](https://www.financedigest.com/oil-prices-extend-gains-with-falling-supplies-in-focus.html "Oil prices extend gains with falling supplies in focus") and signs of currency weakness. These considerations, though, would also apply across the broad EM equity asset class. India’s robust external financing position provides support to the currency. While a higher oil price and/or higher US interest rates present risks, the Reserve [Bank of India has access to ample foreign exchange reserves should it need to intervene in financial markets](https://www.financedigest.com/the-stem-cell-banking-market-to-keep-up-the-digitized-momentum.html "The Stem Cell Banking Market to keep up the digitized momentum") and reduce currency volatility. Furthermore, we also believe that the Indian equity market’s more domestic focus relative to other EM countries should better insulate it from any adverse impact of higher US [interest rates](https://www.financedigest.com/ecb-needs-to-keep-interest-rates-sustainably-high-to-combat-inflation-lagarde.html "ECB needs to keep interest rates ‘sustainably high’ to combat inflation – Lagarde"). Indeed, the Indian equity [market is distinct from other major EM countries for its overwhelmingly domestic focus](https://www.financedigest.com/unicredit-focused-on-internal-delivery-open-to-ma-in-all-its-markets.html "UniCredit focused on “internal delivery”, open to M&A in all its markets"). This characteristic should allow investors to capture specific local [growth drivers](https://www.financedigest.com/automotive-balance-shaft-market-competitor-analysis-winning-strategies-and-growth-drivers-2025.html "Automotive Balance Shaft Market Competitor Analysis, Winning Strategies and Growth Drivers 2025"). Relative to the broader MSCI EM Index, India has higher weightings in financials, healthcare, [consumer discretionary and consumer staples](https://www.financedigest.com/consumer-staples-banks-lift-uks-ftse-100-after-sharp-selloff.html "Consumer staples, banks lift UK’s FTSE 100 after sharp selloff"), but a lower exposure to technology – unlike many of its Asian peers. An allocation to Indian equities can, therefore, offer [portfolio diversification](https://www.financedigest.com/investment-portfolio-diversification-why-its-important-and-how-to-do-it.html "Investment Portfolio Diversification: Why It’s Important and How to Do It") within a broader EM allocation. On an outright basis, the valuations of Indian equities appear expensive across a range of metrics. The MSCI India [Index now trades at 25 times price](https://www.financedigest.com/world-food-price-index-falls-for-sixth-month-in-sept-fao.html "World food price index falls for sixth month in Sept -FAO") to earnings, with financials, consumer discretionary and consumer staples standing out as particularly expensive. However, when considered against the broader EM [Index in US dollar](https://www.financedigest.com/dollar-index-jumps-after-u-s-retail-sales-show-surprise-rebound.html "Dollar index jumps after U.S. retail sales show surprise rebound") terms, these valuation measures are close to the long-term average. Furthermore, we have to acknowledge that historical valuation comparisons may be less relevant to an economy that is [seeing meaningful structural change](https://www.financedigest.com/the-automation-control-system-market-to-see-through-the-probable-sea-change-through-digitization.html "The Automation Control System Market to see through the probable sea change through digitization"). --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---