Pankaj Murarka of Renaissance Investment Managers says India’s equities are highly valued but anticipates gains in H2 2025, supported by earnings recovery and government fiscal stimulus measures.

New Delhi

India's stock market is considered one of the most expensive in the world outside the United States and has recently underperformed compared to other emerging markets. This underperformance is attributed to a slowdown in the Indian economy, with growth rates moderating from previous highs and corporate earnings growing at a slower pace.

Despite these challenges, recent fiscal stimulus measures and early signs of demand recovery are expected to improve earnings in the near future. Sectors such as large banks and consumer staples are highlighted as areas with potential upside due to improved credit growth and strong asset quality. The long-term growth outlook for India remains positive, with expectations of a cyclical recovery driven by consumption.

Why India's 'expensive' stock market could still see an upswing

Let's talk about the valuations right now in India because some say that this is one of the reasons why they're not exactly lighting up the stage at the moment. They're still up here today but again not as impressive as recent years. Some actually do feel that perhaps price to price to book a basis. It has already become more lucrative. But again some say that there's still a need to see these valuations perhaps come down a bit more. What are your thoughts on whether or not the markets in India are correctly priced or if they're a little bit too expensive right now. Just to put things in context J.P. I think there's no denying the fact that as I said India is the most expensive market in the world outside of U.S. over the last one year. Indian markets have underperformed the regional markets significantly. In fact this is the biggest underperformance I'm seeing of India was the MSC emerging markets in the last 16 years. Having said that the underperformance is also driven by the fact that Indian economy has been in the midst of a slowdown. And I believe there is a growth reset and downward reset in India's growth trajectory for the medium term. For three years out post forward India had an average growth of 8.2 percent. Indian economy now is doing a real growth of about 6.5 percent. And I think probably that is a new normal for Indian economy at least for the next eight quarters. And the spillover we've seen the slowdown or the slowdown in the economy spillover to earnings growth for the last six quarters. Earnings for corporate India has grown at mid single digit. That's significantly lower than the mid teens kind of a growth that India is used to seeing. But I do see the good thing is probably that the low point of this slowdown is behind us. And we expect given the fact that the Indian government has infused significant fiscal stimulus in the economy to the order of something like 30 billion dollars which is about 0.7 percent of GDP. We think this stimulus is already showing early signs of demand recovery on the consumption side. So we think the second half for India of this financial year will be much better than the first half of the financial year. So we do expect some earnings uplift in the second half of the year. And more importantly I think CY 26 next year could be a good year for India because we do see India's earnings growth going back to meetings kind of earnings growth after two years of slow or sluggish earnings growth. So in context of that I still think that valuations can moderate a bit more. But it is not a bad time to invest into India because the long term promise of India being a secular growth story or long term secular growth story still very much remains in place. And again as you mentioned the sector earnings is expected to improve after a subdued last couple of quarters. Are there any particular sectors that might see more of an upside at the moment. And are there sectors perhaps that might continue to drag and perhaps might not be as lucrative as compared to some of their other peers. Well we like financials and especially the banks and the larger banks in India because we've had a quite a slowdown in credit growth in India. But after the Central Bank of India the Reserve Bank of India having cut rates by about 100 basis points and recovering consumption in the economy we expect a revival in credit growth into India and going back to probably you know 12 13 percent from about 8 percent which is what we're experiencing now in the next year. And the good thing is the large banks in India have a very pristine asset quality and they're trading at valuations which are almost 20 percent discount to the broader Nifty index. So we clearly see a combination of successful recovery in earnings one probably an improvement in valuations playing out in banks or the next six to eight quarters. So larger banks in India looks pretty interesting at this point of time. Also given the fact that we're seeing a cyclical we expect a cyclical recovery in the economy largely driven by consumption. I think the staples and discretionary consumption would be a good place to be in India over the next six to eight quarters.

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Tel Aviv-Yafo

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