Is it a "good time" to invest in India?
In this article, we will look at whether it is a “good time” to invest in India by looking at the price and earnings of the MSCI India Index.
Note that this article should not be viewed as an analysis of current or forecast future economic performance of India. Those require a different set of indicators which was discussed here.
Price to Earnings Ratio
By applying the reversion to mean approach, I’ve indicated on the following graphs, the points of interception between the current P/E with the 3-year rolling average and cumulative average p/e values.
Intersection with 3 years rolling average are short-term indicators (circled)
Intersection with cumulative average are long-term indicators (Highlighted shades)
Here’s how you should interpret the insights from the chart:
Shaded in red: market being too optimistic
Shaded in green: market being too pessimistic
Circled in red: signs of potential overvaluation moving forward
Circled in green: signs of potential undervaluation moving forward
Basically, based on the indicators set up above, it seems that India is trading at a range that seems to be overvalued and filled with optimism.
However, given that India’s economy has been growing at a stable rate and are expected to grow even more in the future, the Price to Earning ratio may not be a good indicator to access if it is a good time to invest in India.
For that we will have to turn our attention to both the behavior of Price and Earnings to identify if the recent increase in valuation is driven by actual underlying growth or speculative demand.
Looking at the price and earnings behavior, it is evident that since 2014, India’s price has been driven by a market optimism of the future as the growth in prices outpaces the growth in earnings.
However, this optimism may be justified if we were to compare the behavior between the performance of India and Asia Ex Japan as a whole.
Looking at the earnings growth, we see that India has consistently outperformed Asia Ex Jap since 2013.
Furthermore, if we were to examine the long-term prospects of the country, the valuation may be justified.
However, it is worth noting that moving forward, India’s short-term performance may not be rosy given its recent slowdown triggered by macro uncertainty and global economic slowdown. As such, short term investors may want to be more cautious when approaching the Indian Market.
Long Story Short
For short term investors: unfortunately, I would not consider investing in India right now if you only have a 3 to 5 years investment time horizon due to:
Pessimistic economic outlook and slowing of growth
Plausible impacts of corona on India’s economy
For long term investors: India is a market worth investigating given the structural growth that India has to offer, however, lump sum investing might not be the ideal way of investing depending on your own personal financial planning and situation.
In short, India may only be a good investment opportunity to long term investors if you have a good grasp of your financial and investment plans in the very first place.
If you are reading this and would like to kick start your retirement or investment planning, you can reach out to me here and I’ll help you make sense of the options available at your current stage.
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Daniel is a Licensed Financial Consultant with MAS, who specializes in retirement and investments planning. Find out more here.
This article is meant to be the opinion of the author and is for information purposes only.
This article should not be seen as a financial advice
This advertisement has not been reviewed by the Monetary Authority of Singapore
Information is accurate as at 31st January 2020