India valuation not stretched on 'equity risk premium' metric: BlackRock

India’s valuations are not “materially expensive” compared to peers but the returns over the next five years could be in low double digits, BlackRock Investment Institute believes.

 

In its 2025 ‘Global Outlook Report’, the research firm said India’s high price to earnings (P/E) ratio is on account of its relatively strong growth outlook.

 

The report pegs the corporate earnings to remain strong over the long run, supported by a robust growth and softening of interest rates to 5 per cent, down from the current 6.5 per cent.

 

“Our preferred valuation metric, the equity risk premium (ERP) - incorporates earnings growth expectations and interest rate projections. Taking both into account, we find our estimate of India’s ERP -- around 4.9 -- to be broadly in line with historical average, suggesting valuations aren't as stretched as they may appear on traditional metrics,” states the report.

 

Vivek Paul, Head of Portfolio Research, BlackRock Investment Institute anticipates potential fiscal stimulus in the Budget to rev up consumption.

 

“With monetary policy easing and with the potential for fiscal stimulus to come, I think that could get the consumption more broadly,” said Paul, adding that a lack of such stimulus dynamics or a disappointing budget could lead to lack of measures to arrest the recent market momentum.

 

Further, the uncertainty over policies by the new Trump government also continues.  

 

“If we’re talking about sort of bespoke tariff dynamics, then the idea of an aggregate impact on overall US inflation rates should be comparatively limited, because there are substitution effects that can occur. It’s country to country. If it is broader, a sort of global, I think that is something that would be more impactful on inflation overall, and therefore growth. We don’t know which of those two paths is likely to occur, and the only evidence that we have thus far is that we had a comparatively more measured approach than some might have thought,” added Paul.

 

BlackRock Investment’s conviction on the US equities continues as it sees the AI theme broadening out. The investment major is of the opinion that the rise of ‘mega forces’ such as AI are transforming economies and have broken the historical trends in real time.

 

“We see the US still standing out versus other developed markets thanks to stronger growth and its ability to better capitalise on mega forces. We up our overweight to US equities and see the Al theme broadening out. We don’t think pricey US equity valuations alone will trigger a near-term reassessment. But we are ready to adjust if markets become over-exuberant,” adds the report.

  BlackRock has estimated that by 2030, spending on the AI infrastructure could top $700 billion, equivalent to 2 per cent of the US GDP.

 

On the other hand, the investment firm is also overweight on China in the near-term.

 

“On China, on a near term basis, we have an overweight position as well. But that is not a structural story. That’s more in relation to the stimulus measures that we've seen and maybe we'll see more of in the future. Structurally, the broad dynamic of geopolitical divergence continues to play out when I look at China,” said Paul.