CNBC's Inside India newsletter: Peaked, paused, and poised? India's market reboot at half-time

CNBC

7 hours ago

Six months ago, the 2025 outlook for Indian equities looked far from rosy.
India's stock market was entering the year from a correction, and my conversations with market watchers were bleak, with many predicting a slowdown in earnings and lofty valuation multiples.
As we stand at the halfway mark of the year, it is safe to say that Indian equities have had a tumultuous six months marked by a bull run following U.S. President Donald Trump's wide-ranging tariff hikes, a sharp sell-off, and signs of a recovery.
Still, the MSCI India Index — which captures the performance of 157 large- and mid-cap stocks — has risen just 5.68% so far, nearly seven percentage points less than the MSCI Asia Pacific Index.
Meanwhile, the 50-stock Nifty 50 benchmark has added 8% so far this year, underperforming the 19.6% gains in Hong Kong's Hang Seng Index and the 29.4% surge in South Korea's Kospi index.
My conversations on what was not too long ago one of the world's top-performing stock markets, have transitioned from euphoria to cautious optimism in the short term.
"Indian markets peaked last September and then corrected all the way till February before bouncing back to peak levels now. However, quarter-on-quarter earnings have continued to slow, so we're back to square one," Pramod Gubbi, co-founder of Marcellus Investment Managers, told me.
Lower earnings aside, experts have also raised concerns over India's ability to withstand competition from regional peers, which boast cheaper multiples while also having favorable demographics that support consumption growth.
A strong contender is Hong Kong, which has seen a surge in listings and is reportedly attracting renewed interest from global funds.
Vivek Subramanyam, founder and CEO of investment bank and asset manager TH Global Capital, estimates that the Nifty 50 is trading at a 60% premium to the Hang Seng Index and a 70% premium to its emerging market peers in Asia.
"Regions like Taiwan and emerging Asia ex-China, with stronger growth prospects, could potentially outperform India," he said.
Still, Subramanyam expects Indian companies' earnings per share in 2026 to grow at around 15% or 17% higher than that of its peers in emerging Asia and double that of those on the Hang Seng index.
He expects Indian markets to "produce another single-digit gain" of up to 9% to 10% in the next six months.
A trade deal between the U.S. and India — which is expected very soon — would allow for growth to come in at the higher end of the range as it would indicate a reduction in India's protectionist policies, Subramanyam explained.
"India's valuations are certainly elevated compared to other emerging markets, and the short-term upside is limited. But I think the recent slowdown and ongoing recovery in growth make now a good time to selectively buy Indian equities in the medium to long-term," he added.
As investors take bets on India, Subramanyam cautioned on the need to be careful when picking stocks.
Subramanyam is looking out for companies with superior returns and what he calls "recurring revenues," which are predictable and sustainable over a 5-year period.
One such company is Home First Finance Company India, which offers home loans catering to India's low and middle-income strata.
"People are always going to need home loans. So, there is an inherent revenue stream for the company, which I think can compound in the next few years, given India's growing young population," Subramanyam explained.
Marcellus' Gubbi is similarly looking at companies with strong balance sheets and cash, which can easily be deployed for R&D, advertising or even productivity-enhancing initiatives for staff, which can eventually yield better performance and earnings growth.
I asked if he has a preference for value over quality stocks, and large- or small-cap names.
He said, "I think value and quality have pretty good representation across market cap spectrums. You can't really say that all large cap stocks are quality, small cap is value."
Large caps, Gubbi says, are trading at a discount to small caps as the latter have been seeing a "disproportionate amount of fund flows," partly because of investments by retail investors in domestic mutual funds.
He has a bottom-up approach to stock selection, which is agnostic to sectors and market capitalization.
Gubbi, however, added that flexi cap mutual fund managers are increasingly in favor of large caps over small-cap names when deciding allocations, "partly because valuations are still relatively lower."
My takeaway from speaking to Subramanyam, Gubbi and Kevin Carter, founder of EMQQ Global, is consistent: India is a long-term play.
Gubbi tells me that "predicting short term stock price moments is not just typical, it is futile to some extent."
India, Carter added, is a place where every emerging market investor should have their money in.
"India's population is bigger than all the other emerging markets combined, excluding China. So on paper, it is perfect. It's got the biggest population, the best demographics, the fastest growth, and that's driving consumption, so on paper, it's everything you could ever ask for," Carter added.
The investor — whose focus is primarily on new age tech companies — says that Indian internet companies offer stronger growth momentum and attractive valuations than their emerging market peers, despite being a tad more expensive.
Companies he is betting on include Eternal, the parent company of food delivery platform Zomato, travel platform Le Travenues Technology, also known as Ixigo, and recruitment and matrimony platform Info Edge.
These companies are in the early innings of their growth, Carter says, adding that they have huge potential to grow their revenues and profits as Indian consumers become more affluent and spend more over the next decade or two.
He foresees that Indian tech names will see a pickup in investor interest in the medium term, as investors look to rotate out of U.S. tech names, such as the so-called Magnificent Seven stocks, amid macroeconomic uncertainties and a weaker dollar.
"India has solid digital public infrastructure and the best leaders running tech companies. So it's a perfect place for global investors to invest in, especially for internet companies, which are set to see a compounding in its growth," Carter added.
Radhika Rao, senior economist at DBS, said there are positive signs that Indian markets could reach new highs. Rao is also optimistic that India can reach a deal with the U.S., but noted that New Delhi might not lower barriers on its agriculture sector too quickly.
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