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Informist, Wednesday, Feb. 12, 2025

 

MUMBAI – The Indian stock market is likely to underperform the MSCI Emerging Markets Index for the rest of 2025 amid the risks of an economic slowdown, further outflows of foreign funds, and high valuations of mid- and small-cap stocks, Capital Economics said in a report Tuesday. The London-based economic research firm said earnings estimate for Indian companies are "too optimistic" and a pronounced slowdown in earnings would lead to a further cut in estimates.

 

Capital Economics expects earnings growth of Indian companies to be higher than in the pre-pandemic period, but the consensus estimate of 16% growth in earnings for companies in the MSCI India Index in 2026 seems high, it said. Though this estimate is lower than the 19% average annual growth rate recorded during the post-pandemic boom, it is higher than the 10% average annual growth rate during the pre-pandemic period, the report added.

The firm said valuations of mid- and small-cap stocks remain high even after the recent correction, which makes the Indian market vulnerable to 'swings in risk appetite'. Apart from these factors, a stronger dollar, higher bond yields, uncertainty around global trade, and tightening regulatory policy could take a toll of foreign investors' appetite to invest in emerging markets, it said. Banking stocks, which have relatively lower valuation, are unlikely to aid a recovery in the Indian stock market because of pressure from deteriorating assets and the Reserve Bank of India tightening credit policy, it said.        

 

Given the worries about US President Donald Trump's tariff threats, Capital Economics said India may have a chance to benefit from rising tension between the US and China, which could open manufacturing opportunities for India. However, the potential trade conflict between the US and China may not prove to be a boon for Indian equities, the firm added. Also, there are risks of reciprocal tariffs, given that India itself has high tariffs, it said in its report.

 

The MSCI India Index has underperformed the emerging markets benchmark across all sectors since the December quarter, Capital Economics said. Among sectors, utilities, consumer discretionary goods, and communication services have been major laggards since Sept. 26. While the information technology stocks in the MSCI Emerging Markets Index have risen nearly 6% since Sept. 26, those in its India index have fallen over 6%, as per the report. Sept. 27 was when the Indian benchmark indices ended at record closing highs.  End

 

Reported by Aman Aryan

Edited by Rajeev Pai

 

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