India Equity Markets Poised for Turnaround as Earnings Improve, Foreign Interest Returns
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India’s equity markets may be on the cusp of a recovery, following a year of underperformance relative to global peers, driven by improving corporate earnings and a potential resurgence in foreign investment, according to recent analysis.
After lagging behind a widespread global rally, India’s market is showing signs of a shift, with fundamental indicators suggesting a bottoming out of the earnings cycle. A senior analyst noted that while global and emerging markets have seen gains of 30% year-to-date, India has been a “relative laggard.”
Underperformance Rooted in Earnings Cycle and Valuation
The recent underperformance stems from a confluence of factors, including a nearly year-long downturn in corporate earnings and stretched valuations at the beginning of the period. “The combination of higher valuation with earnings in a down cycle for a year is what has caused India to underperform,” one analyst explained. Other economies, meanwhile, benefited from more robust policy support.
However, the tide appears to be turning. Recent quarterly reports have been “pretty decent,” with upgrades particularly evident in the financial segment, signaling a potential reversal of the earnings slump. This improvement is crucial, as a recovery in earnings is expected to attract foreign institutional investors (FIIs) back to the Indian market.
FII Flows Could Surge as Valuations Become More Attractive
The market has already witnessed consistent FII inflows in recent months, and analysts believe this trend could be sustained as India’s fundamentals strengthen. While approximately $45 billion in net inflows have entered the market since April – coinciding with the global rally – India remains in a deficit of $16 billion year-to-date.
Notably, India currently represents one of the most underweight positions in emerging market portfolios, with allocations at nearly two-decade lows. As earnings rebound, investors will likely need to rebalance their portfolios, potentially driving increased allocations and further inflows into India.
Emerging Market Rotation Favors India’s Potential
The current global investment landscape is characterized by a rotation among emerging markets, as investors seek opportunities beyond the United States. A weakening dollar, slowing US growth, and anticipated rate cuts from the Federal Reserve are creating a favorable environment for emerging economies.
“The environment of non-recessionary Fed cuts is always good for asset markets including in EM,” one analyst stated. The dollar is currently estimated to be 15% overvalued, and continued weakness would further bolster emerging market equities. Throughout the year, investor focus has shifted from Europe to Latin America, then to Asia and South Africa, with India and parts of the Middle East representing the current laggards.
While caution remains regarding the Middle East due to oil market uncertainties, India is emerging as a compelling “catch-up story.” Valuations, though still somewhat elevated, are less stretched than they were a year ago, and the return of FII flows is setting the stage for a potential rally.
