A recent DSP Mutual Fund report points to a significant difference between India and China's equity markets. With double the market capitalization of India and a GDP five times larger, China has technically outperformed India in economic growth and equity market performance over the last few years.
Between 2004 and 2021, China’s economy outgrew India’s GDP at a ferocious pace but has lost some relative momentum since. Over the past 3 years, the Indian economy and equity markets have outperformed China, the report said.
Regarding market quality, India is high-quality and expensive, and China and South Korea are lower quality and cheaper. India is appealing since the country has great demographics, ongoing economic reforms, and realignment of global supply chains.
Despite Indian equities having relatively high price-to-book ratios, which were similar to the US, the return on equity is also similar to the US, justifying their premium valuations. However, it is felt that if India finds a significant drop in valuations, it would prove to be an excellent entry point for long-term investors.
In the current phase of remarkable optimism in the global markets, Brazil stands out for its significant earnings growth coupled with excellent valuation trends.
India's exceptional earnings growth, though accompanied by premium valuations, has made Indian equities less of a bargain opportunity. The report also concludes that Indian equities at present do not provide a margin of safety for investors.
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