'Markets Can See More Price Correction in the Coming Quarters'

Sunil Koul, executive director Asia Pacific portfolio strategy, global macro research) at Goldman Sachs, in an exclusive interview with Ayaan Kartik and Neeraj Thakur, talks about the valuation situation in India and how foreign investors are looking at increasing their bets in the equity markets

There have been concerns about the valuations in the Indian markets. What do you think about the premium at which Indian markets are trading compared to others in the Asian region?

The valuations of Indian markets look high compared to the rest of the region. However, with MSCI India trading at 22 times forward PE right now, we think Indian equities are 'richly' valued, but not 'overvalued'.

We think 20 times is probably a fair value for Indian equities based on the macroeconomic environment. However, relative valuations of Indian markets are not at the peak currently. Indian markets are trading at a 65% premium to the rest of Asia, way below the peak of 100% which we have observed about 18 months back.

What helps India is the consistent earnings delivery, which offsets the higher valuations. If one entered 2023 with the assumption that Indian markets were overvalued, they would have missed the -20% rally. Profits last year grew by 20%, suggesting that the gain in large caps was entirely driven by underlying earnings growth. This consistency in earnings delivery is why we are positive about the India story.

Since Securities and Exchange Board of India (SEBI) has flagged concerns about small- and mid-cap segments, broader markets have seen corrections. How do you see the concerns over froth in these segments?

Strong domestic inflows drove a lot of these stocks higher. Both valuations and positioning for some of these companies got crowded. So, the correction we saw is quite healthy because it took out some excesses in the markets.