What to expect when other markets have become so cheap compared to India

Other stock markets are so cheap that it is a rising risk to the future return of the domestic stock market.

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It is rational to deploy additional funds in developed and emerging markets (EM). Because the valuation gap between India & Others has widened exponentially, and the domestic economy is forecasted to slow down in FY24.

India is forecasted to grow by 6% in FY24, compared to 6.8% and 8.7% in FY23 and FY22. Foreign investors will have the option to deploy and shift funds from one country to another, while possibilities for a domestic investor will be limited.

However, there are options to invest in foreign stocks and based funds through direct schemes, which is not the debate of the article.

We will discuss what a retail investor should expect and act as the risk of underperformance in India is rising:

Firstly, we should understand that the general outlook for emerging markets has improved. Overall, EM economies are expected to improve in CY2023. According to the IMF’s October 2022 report, the Emerging and Developing Asia region’s GDP will grow by 4.9% in 2023, up from 4.4% in 2022.

The Chinese economy can provide a wonderful rally, supported by the relaxation in the zero tolerance Covid-19 policy. Similarly, the South-East Asian Region is expected to perform well and benefit the overall EM stock market.

This will bring invariable positivity to India. We can underperform but expect moderate returns without falling into negative territory.

Secondly, as the EM economies improve, world supply constraints will be resolved. Supplies were heavily impacted by the pandemic, and the issue expanded in 2022 through the Russia-Ukraine war.

The effect started to diminish and is visible from the fall in commodity prices. The majority of Asian EMs are heavy importers & traders of commodities and related products. Ease in inflation & increase in supplies will benefit EMs, especially India, by fall in crude & metal prices inching margins higher.

Thirdly, the valuation of total EMs has become lucrative while the economic worst is over. This will trigger buying interest for EMs. The valuation of MSCI-EM is at 11.3x, which is 25% below compared to the long-term average.

Generally, India gains from the positive movement of EM, being an important part of the category.

However, this time there is a risk of underperformance in the short term due to premium valuation. Still, India will be able to garner gains by being a resilient long-term player. A fall in the share of foreign inflows can be supported by stable investments by retail and DII inflows.

A retail investor should not be very concerned about the risk of underperformance by India. We should continue to invest in India with moderate expectations.

Coincidentally, if we have a consolidation in the short term, it should be taken as a shot in the arm, generating an opportunity to buy deeply.

Such a correction can be triggered if the recession risk enlarges to a long stagnation, surprises in the union Budget 2023 and the general election of 2024.

An important caution while investing is to avoid highly valued stocks and sectors. Focus on areas that are going to benefit from the fall in inflation.

And also provide an ample share of investment in bond papers, which offer a healthy coupon rate from 7.5% to 10% annually.

(The author is Head of Research at )


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)