As the new year unfolds, we felt it prudent to start by evaluating not only the Indian markets but also international markets in terms of growth prospects and relative valuations. The attempt was to separate media and politically driven narratives from hard numbers to make informed investment decisions.
What is the prevailing narrative currently?
- With the potential return of a Trump government, U.S. market valuations are at record highs, the dollar is stronger than ever. The Fed will cut rates taking equities even higher?
- India is celebrated as the fastest-growing major economy.
- Japan is recovering steadily whilst Europe seems to be in a flux?
- Meanwhile, China faces a growth slump, compounded by a demographic decline and geopolitical tensions.
What the Numbers Say
To discern the actual state of global markets, we analyzed key valuation metrics:
- Price-to-Earnings (P/E) Ratios: Current P/E ratios were compared with historical medians to gauge relative overvaluation or undervaluation.
- Market Cap to GDP: The Buffett Indicator, often used to evaluate market valuations, was employed to analyze whether markets are priced above or below their economic output.
Valuation Insights
The analysis revealed some striking insights:
- The Chinese market’s P/E ratio of approximately 9.43 is significantly lower compared to the U.S. market’s P/E ratio of 26.92. Relative to historical medians, China’s current valuation is below its long-term median of around 15, while the U.S. market is trading well above its historical averages, signaling potential overvaluation.
- In terms of GDP growth, China posted a rate of 5.2% last year, which, while lower than India’s 7.0%, remains higher than the U.S. growth rate of 2.8%. Despite this robust growth, China’s market valuations reflect a considerable discount, trading at less than half the P/E of the U.S.
- The Market Cap to GDP ratio for China is at 54.37%, significantly lower than India’s figure of approximately 105% and the U.S.’s ratio of around 175%. This further underscores the undervaluation in Chinese markets.
Weighing Growth Against Risks
Valuations, however, must be balanced with growth prospects and risks. While China offers attractive valuations, several headwinds persist:
- Geopolitical tensions and tariffs continue to create uncertainty.
- A weakening Yuan adds to currency risk.
- Concerns about demographic decline could impact long-term growth.
Despite these challenges, the risk-reward profile of Chinese markets might be worth considering. With current restrictions on outbound capital and TDS applicability, domestic investment options in India quote at premium and are limited with a couple of mutual funds and one ETF in the space. Still, ETFs like MAHKTech ETF manage to provide exposure to companies with excellent ROCEs and reasonable growth rates, available at good valuations. These include well known names like Xiaomi, Lenovo, Alibaba, Tencent, Meituan, Baidu, Weibo and BYD amongst others. These companies represent growth stories in technology, semiconductors, electric vehicles and several other high growth sectors at compelling valuations.
Our View
In our view, the core numbers offer a very different perspective to the prevailing narrative. While the Indian markets garner attention for growth and resilience, China could present an even more interesting opportunity for value-driven investors. Our view on the US markets is not positive, and once the dollar upmove stabilises maybe the next stage could belong to the emerging markets together – be it higher alpha from the return to mean of Chinese valuations or continued alpha from the Indian growth story. We are positioned according to our view – with overweight allocations to Chinese equity.
