Increasing gap: Indian equity market valuation discount to US widens

Nifty 50 trading at 20% discount, highest in 17 years

Listed equities in India have lost their premium over their global peers and the valuation discount is widening, which is a reversal, given the historically high valuation here compared to other major markets. 

The Nifty 50 index is now trading at a nearly 20 per cent discount in valuation to the S&P 500, close to the highest in the past 17 years. 

For example, until two years ago, the Nifty 50 used to trade at a premium to the United States (US) benchmark equity index. It is now trading at a trailing price-to-earnings (P/E) multiple of around 23.4x compared to the S&P 500 trailing P/E multiple of around 28x. 

For comparison, the Nifty 50 was trading at a trailing P/E multiple of 22.6x at the end of November last year, while the S&P 500 was trading at a trailing P/E multiple of 27x a year ago. 

Historically, the broader equity market has mostly traded at a premium to the US market during the better part of the last 20 years.

 

Between 2006 and 2023, equity valuation in India was lower than in the US on few occasions and that also for brief periods, such as in the second half of 2008 and early 2009 after the global financial crisis; in the second half of 2013 during the euro debt crisis and US Federal Reserve taper tantrum; in the last quarter of 2016 after demonetisation in India; and in the first half of 2021, when there was a global selloff in equities after a sharp rise in bond yields worldwide.

 

These sporadic episodes of discounted valuation have always been followed by a sharp rise in valuation on Dalal Street, restoring the Indian market premium over other major markets.

 

This shows in the historically high equity valuation in India. For example, in the past 20 years, the Indian benchmark equity index, on average, has traded at a trailing P/E of 20.4X, nearly 6.9 per cent higher than the average S&P 500 trailing P/E of 19.1X during the period. (See the adjoining charts.)

 

The current episode of discount is now in its 23rd month and the longest such stretch since 2006.

 

The comparable P/E multiple of the Nifty 50 has been available only since April 2003. The Indian market consistently traded at a discount to the US market for nearly three years from 2003 to 2006. 

 

Analysts attribute the discount to a sustained selloff by foreign portfolio investors (FPI) and a sharp rally in artificial intelligence (AI) stocks in the US.

 

“There has been a sharp rise in equity valuation in the US, led by AI stocks, while valuation in India has been under pressure as FPIs continue to sell,” said G Chokkalingam, founder and chief economic officer, Equinomics Research and Advisory.

 

According to the data from NSDL, FPIs have cumulatively withdrawn around $16.8 billion from the Indian equity market since the start of this year.

 

According to analysts, the selloff is due to poor corporate earnings growth in India compared to the US. The Nifty 50 underlying earnings per share (EPS), which tracks the combined net profits of 50 companies that are part of the index, is down nearly 2.5 per cent in dollar terms in the past one year. In comparison, the S&P 500 EPS is up around 8.5 per cent in the period. The Nifty 50 EPS on Friday declined to $12.32 from $12.63 at the end of November last year.

 

In the same period, the S&P 500 EPS increased to around $243 from $223.8 at the end of November last year.

 

“FPI flows will not come if there is no earnings growth in real terms and this is what we have seen in the better part of the past two years,” said Dhananjay Sinha, co-head, research and equity strategy, Systematix Institutional Equity.