India's stock market valuation premium over China narrows

India's stock market valuation premium over China and other emerging markets (EMs) has decreased significantly. In 2021, India's premium was high, but it has now shifted to around -1 standard deviation (SD). Despite this change, India still attracts investment, thanks to strong economic fundamentals and growth potential. In the past six months, China's stock market has performed well, posting a 26.4% gain. Other markets like India, Brazil, Malaysia, and Indonesia have seen corrections. Yes Securities reports that, although valuations in India have dipped, the market continues to draw interest due to higher expected returns on equity. A key trend noted is the shrinking difference between the Price-to-Earnings (PE) ratio of India's Nifty 50 index and the broader EM index. This difference has moved to nearly one SD below the historical average, reversing from earlier highs when it exceeded +1 SD. Despite this reduction, India retains a valuation edge driven by better profitability prospects. China's stock market has also changed, with the CSI 300 index moving from a valuation discount to a slight premium. This shift reflects improved sentiment toward Chinese equities. Meanwhile, India's valuation premium over China has narrowed sharply, but investor confidence remains due to strong economic indicators. Globally, there is a rebalancing happening between developed markets (DM) and EMs. The premium that DM has over EM is declining. With EM earnings growth outpacing that of DM, investors are looking more at EM opportunities. India, in particular, is well-positioned, with a projected 15% forward return on equity, making it more attractive than several other EMs. Overall, earnings growth within EMs has improved significantly and is expected to continue surpassing DM profit growth in the coming quarter. This trend could support a reevaluation of how EMs are viewed relative to DMs.