India equities appear poised to top broader emerging markets gauges again in 2024, extending a now multi-year trend. Some market observers believe it could happen again next year.
As of December 24, the MSCI India Index was beating the MSCI Emerging Markets Index by 160 basis points on a year-to-date basis. Confirming that there are advantages to being selective with India exchange traded funds, the advantage over the broader emerging markets gauge for the WisdomTree India Earnings Fund (EPI ) was 360 basis points.
That extends a lengthy run in which EPI has outperformed broader indexes of developing world equities. It has also outperformed standard benchmarks of Indian stocks. The 2024 showings of India stocks and ETFs, including EPI, were subdued. However, some experts believe India stocks to again emerge as markets leaders in 2025.
EPI Has Right Recipe for 2025 Rally
Global investors have expressed concern about the rich valuation of India stocks. This concern strikes particularly when measuring them against China fare or other developing economies.
“In India, the market is richly valued versus history, profit margins and earnings expectations are elevated, and escalating equity supply has increasingly offset strong domestic fund flows,” according to Schroders. “Most recently, nominal growth (i.e. growth unadjusted for inflation) has slowed, led by tighter fiscal and monetary conditions, and the market has softened as earnings expectations are challenged. This may present an opportunity.”
EPI provides some buffer against frothy valuations among India stocks, because the ETF’s underlying index only includes profitable companies. Looked at another way, it’s possible for money-losing firms, regardless of home domicile, to become expensive. However, profitable companies with earnings growth may be deserving of high multiples.
Adding to the potential allure of EPI and India ETFs in 2025 is India’s status as one of the large economies that would be unlikely to feel ill effects from U.S. trade tariffs should President-elect Trump decide to employ those levies.
“The monsoon was good in 2024, which typically leads to an improvement in rural incomes, while there is some scope for monetary easing. India is also geopolitically neutral and less exposed on tariffs versus other EM and has an interesting structural growth opportunity,” added Schroders.
Another potential assist for EPI could arrive in the form of global investors currently being under-allocated to India — a scenario that could change if stocks there rally early in 2025.
“Finally, foreign investors have low allocations to the market. We will be monitoring the market in the coming months, looking for a sufficient re-set in valuations and earnings expectations to lift our exposure,” concluded Schroders.
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