Indian equity market has more room to correct: Manishi Raychaudhuri

Says that geopolitics will be the most important driver of financial markets in 2025

It has been a topsy-turvy few months for the Indian equity markets. Hong Kong-based Manishi Raychaudhuri, chief executive officer of Emmer Capital Partners, tells Puneet Wadhwa in a conversation that geopolitics will be the most important driver of financial markets in 2025. Edited excerpts:

 

Calendar year (CY) 2024 proved to be a perfect storm for the Indian equity markets as they dealt with election results, sticky inflation, extreme climate, valuation woes, and slowing corporate earnings amid global headwinds. Is the worst over?

 

The Indian equity market has more room to correct. Valuations have corrected, but not enough. In late September, at its recent peak, India was trading at an 85-90 per cent price-to-earnings premium to Asia ex-Japan. That has corrected to less than 60 per cent but is still significantly higher than the last 10 years’ average of 38 per cent.

 

The correction has been driven, not only by India’s expensive valuation and revival hopes in other parts of Asia, but also by declining earnings estimates. India’s consensus earnings per share (EPS) estimates for CY 2025 and CY 2026 have declined by 5-6 per cent over the past four months.

 

Can they slip into bear territory in 2025?

 

The next two to three months will be crucial for Indian and emerging market (EM) equities. Domestically, we’ll possibly have to deal with more earnings estimate cuts and some more volatile corporate commentary during the January result season.

 

Globally, more trade-related and geopolitically sensitive policy articulation and uncertainty about inflation and the US Federal Reserve rate trajectory would likely add to EM volatility.

 

For India, a further round of relative valuation compression could be on the cards. That could play out as Indian equities declining or the rest of Asia rerating, or a combination of both. However, to characterise such a correction as a bear market would be premature.

 

How worried are you regarding the valuations of the Indian markets versus peers?

 

Given that the Nifty 50 has corrected only 7.4 per cent from the peak in late September and consensus EPS estimates are down by 5-6 per cent, we don’t think the Indian market has overreacted to the domestic and global headwinds. Usually, small and midcaps decline more than largecaps in a correction phase, but in the present episode, we don’t see these signals either.

 

For signals of valuation stability in India, we look at India’s valuation premium to Asia ex-Japan. When the premium corrects to 40-50 per cent (from the present 60 per cent), there could be a sustainable revival in Indian equities on the part of foreign investors.

 

Indian markets have traditionally enjoyed a valuation premium versus their EM peers. So, why the panic (selling) this time around when the earnings did not come through as expected?

 

India deserves to trade at a premium to its Asian peers. It’s the fastest-growing Group of Twenty economy, has a large liquid market with a broad range of growing sectors, and has many ‘consistent compounders’ — companies that unfailingly generate a return on equity in excess of their cost of equity. However, in the present instance, India’s valuation premium went way beyond the usual range, leaving no margin for error. When the earnings estimates started declining and a hitherto ignored market — China — began to provide stimuli to support asset markets, foreign selling in Indian equities picked up at a rapid pace.

 

What are the next set of triggers for the Indian markets if they were to make a U-turn and make a sustained upmove? To what extent will foreign flows be a crucial part of this?

 

A growth revival driven by a resurgence in government spending and recovery in consumption, especially rural, could lead to the next round of earnings estimate upgrades, possibly from early 2025-26. That should be the next catalyst for a robust market recovery.

 

Foreign institutional investor (FII) flows will be an important driver, but not as important as they used to be in the past decade. Steady domestic inflows have been more than neutralising FII outflows lately and should continue to do so, especially if tight monetary conditions loosen and interest rates decline.

 

What’s your pecking order for equities within the Asian and EMs?

 

In our model portfolio, we recommend a significant overweight on Taiwan, a small overweight on South Korea, and a neutral stance on onshore China and India. Among the Asean markets, we like Indonesia, with an overweight position.

 

Do the global financial markets expect an escalation in geopolitical and trade-related wars?

 

Geopolitics will be the most important driver of financial markets in 2025. US President-elect Trump’s proposed tariffs on imports from China and many other trading partners have partly been priced in through the depreciation of the target economies’ currencies. But new trade policy announcements keep coming at a rapid pace and would likely continue after the new administration takes over, implying that the volatility in markets would persist too. The financial markets’ behaviour would also depend on the potential responses of the target economies.