Stock market: India’s valuation premium over US vanishes after a decade; what it means

Stock market benchmark Sensex and Nifty have fallen in five out of the past seven trading sessions, with the market showing signs of caution as the earnings season kicked off, ahead of the US-India trade deal. 

Historically, Nifty has traded at a premium to the US equity benchmark index Dow Jones Industrial Average (DJIA) with a 10-year average premium of around 25 per cent. However, it is currently trading near parity with Dow Jones valuations, suggesting a significant narrowing of this historical premium.
 
On the contrary, Nifty 50 is currently trading at higher-than-average historical premium against Chinese A share index. Yet, the valuation of Chinese shares factor in strong earnings growth in the next one year, which Anand Rathi called 'Blue-Sky Scenario'. 

India vs US vs China: Relative valuations 

Anand Rathi said India, the US and China, have historically showed a clear positive correlation between nominal GDP growth and corporate earnings growth. But the prevailing market consensus reveals important divergences. The broking firm said expectations for Chinese corporate earnings seem unusually optimistic. By contrast, India’s  projected earnings growth is closely aligned  with its GDP forecasts. 

It said Nifty is trading at its 10-year median forward PE, suggesting Indian equities are fairly valued by historical standards. 

"US and Chinese indices, on the other hand, are trading at a premium to  their historical norms. Notably, India’s relative valuation premium to the US has now nearly vanished after a decade of trading at a substantial premium, but it still commands a large premium over Chinese shares," Anand Rathi said.

High India valuations
Nuvama said Indian equities have rebounded 13 per cent from April lows. The bounce is global-driven, with India undershooting EM peers. This is in sharp contrast to the 2023 bounce, which was driven by India-specific factors. This is essentially owing to India’s earnings reconciling with EMs ala pre-Covid. This is likely to endure as domestic growth is slowing, margin levers are exhausted and valuations high, Nuvama said.

Anand Rathi said high relative valuation of Indian equities has been a persistent concern. This issue has been raised  by many experts in the last one year. 

"Yet, this seems to disregard, strong macroeconomic (fastest  GDP growth among major economies) and robust corporate earning growth. We also do not find  and marked increase in India’s valuation multiple vs. past average or valuation premium over peers," it said.