Indian equities are too expensive to be attractive in the short-term

PRESIDENT Barack Obama’s visit to India this week affirmed its status as a rising global power and as a country that is set to assume greater importance on the world stage. Its achievements have long been overshadowed by its northern neighbour China but India has quietly marched along the path to development.

It is certainly easy to make the case for investment in India. Its growth rates are still stunning relative to the developed world; it expanded 8.8 per cent in the second quarter in real terms. And although it will probably struggle to maintain this pace, this is perhaps a (healthy) sign of a maturing economy.

Moreover, infrastructure investment is still desperately required to ease capacity constraints. India is also poised to benefit significantly from its demographic dividend. Around a quarter of the world’s young people are in India and the country’s age dependency ratio forecast to decline to 48.1 per cent by 2025 from 67.7 per cent in 1991, according to research from Barclays Capital.

These are certainly familiar arguments used to support the long-term investment case but market participants requiring good performance in the short-term as well as in the long-term should be more cautious about investing in Indian equities at their current levels.

Kevin Grice, senior international economist at Capital Economics, believes that India will underperform some of the other markets in Asia. “The surge in Mumbai stocks has lifted valuations to the top end of the 10-20 range in which markets usually trade over the long run.”

The current trailing price-to-earnings (p/e) ratio is at 19.9 times and for 2010 it is now 20 times. This compares to an average valuation of 15 times for emerging markets and an average of 18 times during the last up-cycle in India.

“The good macroeconomic outlook is just about priced in now and I expect that the data flow is more likely to disappoint than surprise,” he adds. Consequently, he thinks that “from a shorter perspective, say the next one to two years, Mumbai will most likely underperform, with the high attached risk of a steep fall for a time”.

However, one factor that should support Indian equity markets in the short-term is the flurry of upcoming initial public offerings (IPOs) between now and March 2011. Coal India’s IPO at the end of last month was nearly 12 times oversubscribed, indicating the level of demand that should limit the Nifty 50’s (the Indian stock market) downside. There are at least another six or seven IPOs that are already in the pipeline, including iron ore producer NMDC, Infrastructure Development Finance Company and Orient Greenpower Company.
But in a market that is already fully valued, it’s going to be difficult for market participants to achieve alpha. Investors – whether they are retail or institutional – should wait for valuations to become more attractive before buying into Indian equities.


There are 21 Indian equity funds available to UK investors that have a track record of at least three years. The average performance of a fund over the past three years is 35.82 per cent, indicating how well the Indian stock market has done. The average size of these funds is £715.45m. There are six investment trusts (not shown in the table above) but these have suffered over the past three years with an average performance of -10.26 per cent. These closed-end funds on average have assets under management of £145.85m.