India Valuations Fair: Earnings Key to Upside Over Next 12 Months
India is poised for a unique opportunity in the global market landscape, driven not by superficial hype but by robust fundamentals. As Mark Matthews from Julius Baer points out, while the Indian equity markets may not be on the precipice of explosive growth, they promise something just as valuable: consistent and healthy growth.
Earnings Growth Projection for India
– Matthews describes the upcoming year as “boring” on the surface, yet fundamentally constructive.
– He maintains an optimistic outlook on earnings, stating, Our high teens earnings growth projection for fiscal year 2027 is based on the gradual impact of policy actions already implemented.
– He anticipates 16–18% earnings growth by FY27, emphasizing that many of the benefits from fiscal and monetary stimulus will take time to materialize.
Global Market Dynamics and India’s Stability
The global environment remains volatile, particularly with pressures stemming from the US markets. Concerns over artificial intelligence valuations and the significant investments needed in data centers have created uncertainty. However, Matthews highlights a potential silver lining for India:
– “Since late October, US markets have faced downward pressure due to the AI narrative, which oddly enough helps India,” he noted.
– While India lacks a dominant AI player like its U.S. counterparts, this absence could attract attention as investors seek diversification away from American tech giants.
Cyclical Opportunities Beyond Banking
India offers a broader cyclical investment narrative beyond traditional banking stocks:
– Matthews points out the potential in various sectors like Non-Banking Financial Companies (NBFCs), energy, and materials, which have lagged behind US tech stocks. He insists these areas deserve closer scrutiny this year.
Earnings-Driven Returns, Not Valuation Expansion
Matthews is clear that India’s future returns are grounded in earnings, not inflated valuations:
– “I do not expect a valuation rerating for India…but the good news is that it aligns with its long-term average at around 21 times forward earnings,” he explained.
– He believes that if earnings achieve the projected 17% growth, markets could yield similar returns while maintaining steady valuations.
The Bigger Picture: India’s Global Relevance
China remains a focal point within emerging markets, but Matthews argues that its recent performance may lead investors to consider alternatives. As India has lagged this year, it could soon re-enter global discussions:
– He also notes significant developments regarding China’s currency policies, suggesting a potential shift toward allowing the renminbi to appreciate, which could foster trade stability and support for broader emerging markets.
Conclusion: Patience and Steady Growth Ahead
In a year that may lack thrilling market drama, India’s economic landscape suggests a quietly rewarding environment for investors who prioritize earnings-driven growth over immediate excitement. As global dynamics evolve, India stands ready not just to survive, but to thrive through steadfast and healthy growth projections, reinforced by fundamental strength.