Are Indian Equities an Attractive Overweight After the Recent Sell-Off?

No, we do not think so. India’s economic growth is set to continue moderating, which may lead to further downgrades to stretched earnings growth expectations. Current equity valuations remain elevated, which poses additional downside risk. Still, the recent correction has taken some froth out of the market, and India’s longer-term structural tailwinds remain intact. As such, we think investors should maintain Indian equity allocations in line with policy weights.

Indian equities have declined around 20% since late 2024, ¹ driven by a combination of softening economic data, disappointing earnings results, and high valuations. Indian stocks have also underperformed broader emerging markets (EM) equities by 16 percentage points (ppts) over the same period. The recent correction follows a period of strong performance for India. In the three-year period ended September 2024, India outperformed EM equities by more than 11 ppts annualized.

Recent market weakness reflects expectations that India’s economic growth will continue to moderate. India’s economy enjoyed a post-COVID boost driven by increased government spending and company capital expenditures, but those tailwinds have faded. The central government’s recent budget indicates policymakers are prioritizing fiscal consolidation, with modest support for consumption via income tax cuts. At the same time, monetary policy in India has been tight, weighing on credit growth and demand. Although the Reserve Bank of India (RBI) cut its policy rate in February, the scope for further easing may be limited, given concerns about an inflation rebound and rupee depreciation. Taken together, consensus forecasts expect India’s real GDP growth will slow to around 6.5% in the fiscal years ending March 2025 and 2026, down from 9.2% the prior year.

Forward earnings growth expectations appear lofty considering today’s underlying fundamentals. Analysts currently expect Indian earnings per share (EPS) growth of 17% in 2025, compared to 6.5% growth in 2024 and a long-term rate of 10%. This expectation stands at odds with a softening domestic outlook, given that India’s equity market is domestically oriented and overweight cyclical sectors. In addition, recent earnings momentum has been weak. Trailing EPS measures have rolled over, while 2024 growth estimates were downgraded by more than 7 ppts over the last 12 months. These factors suggest that EPS growth expectations are likely to be downwardly revised in the months ahead.

Valuations remain elevated compared to their own history and versus broader EM stocks. As of February 28, our preferred valuation metric shows Indian equities trade roughly 20% above their trailing 20-year median. In comparison, most other major EM countries today trade at a discount, except for Taiwan. Current valuations suggest Indian stocks are not yet fully priced for an earnings slowdown. For example, India’s price earnings–to-growth (PEG) ratio spiked to 1.7x in February, near all-time highs, as analysts lowered their longer-term EPS growth outlook. This compares to a trailing ten-year median of around 1.1x. Suffice to say, today’s valuation levels suggest an overweight to Indian equities is not prudent.

Nevertheless, we do not think investors should be underweight for several key reasons. First, the current slowdown is cyclical in nature, and India’s longer-term structural tailwinds remain intact. India’s expected growth rate remains notable for an economy of its size and is more than double the rate of global growth. Second, the current policy mix is supportive of long-term sustainable growth. Fiscal policy has focused on reducing deficits and debt, while credible monetary policy from the RBI has kept inflation expectations in check. Finally, India may prove resilient to external shocks in today’s uncertain geopolitical environment. Both the economy and equity market are largely domestically driven, with limited trade exposures compared to the rest of EM.

We expect that the recent weakness in Indian equity performance will ease once forward EPS growth expectations and valuations rerate to levels more in line with the fundamental outlook. In our view, a stabilization of higher-frequency economic data would also support a performance rebound. Indian equities would make a more compelling overweight if these factors are realized. But, in the meantime, we recommend investors hold this allocation in line with policy weights.

Stuart Brown, Senior Investment Director, Capital Markets Research

Vivian Gan, Investment Director, Capital Markets Research

Footnotes

1. Data reflect performance from September 27, 2024, through March 10, 2025, in US dollar terms.