Financial markets are all about sentiments. Often, a broad sentiment in the markets considers many factors that may not be recognized by untrained, inexperienced, and impulsive minds. This is because the markets are driven by investors who are not only aware of what is happening around them but also understand the right implications of these events.
At present, a large section of investors believes that the Indian markets are expensive. Facts support this line of thought. The Indian equity markets have rewarded investors in the past three years. After gaining 21% in 2023, the Nifty 50 index is already up 14% in the year-to-date (YTD) period in 2024. The broad markets, especially small- and mid-cap stocks, have run up much faster.
Though first-time investors find the ongoing rally lucrative, value-conscious investors find it difficult to keep adding to their equity investments at the current level. Equity valuations are stretched in some segments, particularly in small-cap stocks. Earnings growth has yet to catch up. Valuations are not cheap in large-cap stocks either. The forward price-to-earnings multiple for the Nifty 50 index stands at 21, higher than the mean of 16.6.
Comparing the valuation of MSCI India with MSCI Emerging Markets shows a stark difference. It is estimated that the valuation of MSCI India is at an 88% premium compared to that of emerging markets, making investors uncomfortable.
In this context, an investor may want to avoid investing in Indian stocks directly or through a managed vehicle such as an equity mutual fund scheme, portfolio managed scheme, or an alternative investment fund. These usual criteria are used to prove this point. However, there is a simple question that requires a certain amount of big-picture understanding: Are there enough triggers that indicate the strong health of the Indian economy? Let us explore this question in greater detail.
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