Indian equity market remains among the most expensive globally, shows data

Sensex P/E of 26.3x is nearly twice MSCI EM's P/E and 40% higher than Dow Jones

The Indian equity market remains among the most expensive globally despite the recent correction in stock prices. The Sensex is currently trading at a trailing price-to-earnings (P/E) multiple of 26.3x -- nearly twice the MSCI Emerging Market's P/E of 13.9X and around 40 per cent higher than Dow Jones' 19.1x. Only the tech-heavy Nasdaq Composite is more expensive at a P/E multiple of 116.6x, according to the data from Bloomberg.

The stock valuation in India is also on the higher side when compared with other major markets in Asia and developed markets in Europe. For example, Indonesia's benchmark index is currently trading at a P/E of 24.6X, while the Philippines' benchmark index is valued at 24 times its trailing earnings per share (EPS); Thailand's benchmark index is trading at a P/E of around 15x.

Similarly, major stock indices in Western Europe are currently trading with a price-to-earnings multiple that varies from 14.6x in the case of Germany's DAX to a high of 20.8x for France's CAC40.

The equity valuation in India also looks expensive when adjusted for the underlying growth in corporate earnings in the respective markets.

For example, while the underlying growth earnings per share (EPS) for the Sensex is higher than its peers in China, Malaysia, and the Philippines, earnings growth in the last 12 months have been much faster in countries/regions, such as Indonesia, Taiwan, South Korea, Brazil, Thailand, and Singapore.

The earnings recovery from the Covid-19 shock has been much faster in developed markets, such as Japan and Western Europe, than in emerging markets, including India. For example, Dow Jones Industrial Average EPS is up 48 per cent in the past 12 months, while corporate earnings are up 92.5 per cent in dollar terms in Japan. The European indices have reported even faster earnings growth. Germany's DAX's EPS is up 221 per cent since January last year, while France's CAC40 EPS is up 207 per cent.

The Sensex's underlying EPS (in US dollar terms) is up 54.6 per cent in 12 months, a notch higher than the 52.8 per cent growth in the EPS of the MSCI Emerging Market index during the period. Given that the Sensex's P/E is nearly twice that of the MSCI EM's, the P/E-to-growth ratio for the Indian market is nearly 80 per cent higher than the emerging markets average ratio.

According to analysts, the relatively rich valuation increases the downside risk for the Indian markets. "Given that the stock valuation in India remains on the higher side than most emerging and developed markets, our markets face a bigger downside risk from monetary tapering and interest rate hike by the US Federal Reserve,” says Dhananjay Sinha, MD & chief strategist JM Financial Institutional Equity.

The recent increase in interest rate in the United States and a slowdown in asset purchases by the Federal Reserve have led to a correction in many emerging markets because foreign investors have cut their exposure to these markets.

In India, for example, foreign portfolio investors have been net sellers since October 2021, leading to a weakness in the broader market.

This trend is likely to sustain because most emerging markets face a slowdown in economic and corporate earnings growth due to factors, such as higher crude oil prices and a decline in global liquidity.