Investors continue to pour into the Indian stock market. The Nifty 50 Index, up more than 10% year to date, continues to reach new highs. Much of that is due to gains from cheap stocks, including many state-owned enterprises (SOEs) benefiting from government spending. Finding high-quality companies in the Indian market at attractive valuations therefore has become difficult.
One way to understand valuations is the required rate of return, which measures the minimum return for which investors will be willing to allocate capital. An outside view that we refer to is a valuation framework from UBS’ data-analytics platform HOLT that backs out the implied required rate of return investors are demanding from securities in the market, referred to as the market implied yield. At a country level, India’s median market-implied yield of 1.4% is at an all-time low for India and an all-time high premium relative to the broader EM index.
This is underscored when we look at the valuation across sectors. Current valuations are at the extreme point of the five-year range in all sectors, with the sole exception of Financials.
While India’s stock valuations remain high, regulators have highlighted a potential bubble, particularly in the mid-cap segment, and have attempted to limit further domestic flows into these stocks. And with regards to SOEs, we suspect the fundamental weakness of these companies will become apparent over time and that the superior fundamentals of high-quality, fast-growing businesses will once again be reflected in stronger stock prices. ∎