While India’s large-cap stocks trade at 23 times their forward earnings, above historical averages, “we think this high P/E ratio reflects strong growth prospects”, said Powell, chief Middle East, and APAC investment strategist at the research arm of the world’s largest asset manager. “…we don’t see elevated P/E ratios as a reason to scale back equity exposure,” he said. “When factoring in interest rates and corporate earnings growth expectations, valuations appear reasonable”.
Multi-aligned and “connector” countries–like India–could gain from the rewiring of global supply chains, even with uncertainty around future US policies, he said. Powell likes consumption-related sectors, infrastructure and real estate, and select industrials benefiting from government incentives to boost onshore manufacturing.
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Last year, high valuations had kept FIIs away from Indian equities, but we are now observing a resurgence in FII inflows. While the sustainability of this trend remains to be seen, what are your thoughts on the outlook for Indian equities?
We keep a neutral stance on Indian equities in the short term but advocate above-benchmark allocations to Indian equities within strategic portfolios with investment horizons of five years or more. India’s robust growth outlook, underpinned by the economic transformation we expect to unfold in coming years, supports our view that long-term equity returns could be higher in India than in other regions.
We believe Indian equities are not overly expensive, contrary to market consensus relying on traditional valuation metrics. While India’s large-cap stocks trade at 23 times forward earnings, above historical averages, we think this high P/E ratio reflects strong growth prospects.
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Our preferred valuation metric—the equity risk premium (ERP), which includes earnings growth and interest rate forecasts–indicates that Indian equity valuations match historical averages.
Nevertheless, Indian equities aren’t immune to global risk-off moves in the near term. Yet, we believe the attractive risk-return trade-off supports an above-benchmark allocation on a strategic horizon.
In your outlook report, you mentioned favouring countries like India among emerging markets that are at the crosscurrent of mega forces. Could you elaborate this and shed light on these significant forces?
We believe we are in a new regime. Economies around the globe are being transformed by mega forces – or long-term structural shifts – such as the rise of artificial intelligence, geopolitical fragmentation, the low-carbon transition and diverging demographics.
On a strategic horizon, we favour emerging market equities over developed market equities – especially those that stand to benefit from the mega forces – for example, those with young populations. But we also advocate for a selective and granular approach. Broadly, emerging markets have benefited from central bank rate cuts and from stable growth in developed markets. Yet, China’s challenged economic activity and the long-term costs of geopolitical fragmentation present risks to emerging markets.
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We anticipate divergence in emerging market outcomes following a series of significant global elections in 2024. A second Trump administration is expected to seek increased tariffs to encourage manufacturing to return to the United States and achieve other policy goals, while remaining open to negotiated deals. We believe that multi-aligned and “connector” countries – like India – could gain from the rewiring of global supply chains, even with uncertainty around future US policies.
How does India stack up against other emerging markets?
India stands out as one of the world’s fastest-growing major economies, with GDP growth projected to reach 6.5% in 2025, according to the International Monetary Fund – well above global and emerging market averages. We see structural shifts in India aligning closely with the five mega forces we see driving global economic transformation. In addition to its ability to navigate a fragmented global landscape, these include:
Its demographic advantage, with a young and expanding workforce fuelling sustained growth. India’s demographic edge underpins India’s long-term growth prospects. Its working-age population (ages 25–64) continues to expand, in stark contrast to shrinking workforces in many major economies as the population ages. Its supercharged digitization is reshaping financial transactions. The Unified Payments Interface, widespread smartphone use, and the Aadhaar identity system have collectively propelled a digital payments revolution. The digital shift has also led greater financial inclusion.
You’re strongly focused on AI. How do you plan to leverage the AI theme in India?
Just like the rest of the world, India could experience rapid transformation due to artificial intelligence. For India to take full advantage of AI-driven opportunities, it will need to continue investing in AI infrastructure – including local data centres and energy – and in adoption of AI within companies. That will require further development of India’s capital markets to ensure a sufficient flow of credit. In India, an infrastructure boom is already underway, fuelled by ambitious government targets. The government has earmarked infrastructure spending of 3.4% of GDP in the fiscal year ending March 2025 and has doubled such spending over the past three years. We expect infrastructure needs to stay robust in the coming years and see capital markets playing a crucial role in funding them.
Are there any specific sectors in India that particularly catch your attention or interest?
We believe structural shifts underway in India map neatly onto the five mega forces we see shaping the world now and in the future. This leads us to favour opportunities in consumption-related sectors, infrastructure and real estate, and we see potential in select industrials benefiting from government incentives to boost onshore manufacturing. Other than that, we don’t see elevated P/E ratios as a reason to scale back equity exposure. When factoring in interest rates and corporate earnings growth expectations, valuations appear reasonable.
Looking at the bigger picture, what other global investment trends are catching your eye besides AI? And how do you plan to seize these opportunities in your investment strategy?
We are staying pro-risk for now. We see the US still standing out versus other developed markets thanks to stronger economic growth and its ability to better capitalize on mega forces. US equity returns broadened out in 2024 as the AI theme (i.e. AI buildout and adoption) creates opportunities across sectors, such as utilities. We thus tap into beneficiaries outside the technology sector.
Robust economic growth in the US, broad earnings growth and a quality tilt also underpin our conviction and overweight in US stocks versus other regions. We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors. And we continue to favour Japanese equities on both a tactical and strategic horizon given ongoing corporate reforms, and the return of mild inflation driving wage growth, corporate pricing power and earnings.
How do you anticipate oil prices to behave during Trump’s presidency? What could this mean for Indian and other global markets?
President-elect Donald Trump promised voters big policy change. Republican control of both Congress and the presidency means he has greater ability to implement much of his agenda. Markets view some of his proposed policy as positive in the near term – like tax cuts, deregulation and support for traditional energy. Others less so, including curbs on immigration and a wide range of tariffs that – if implemented – could reinforce geopolitical fragmentation and add to inflation. Given the risk of resurging inflation from potential trade tariffs and the immigration slowdown continuing, market expectations of only two more Fed policy rate cuts in 2025 now seem reasonable, we think.
What’s your take on allocating capital to fixed income? Do you think it is a good time to explore fixed income opportunities, especially with equities, both in India and globally, having delivered high returns in the past now?
As with equities, we advocate being selective both tactically and strategically within fixed income. On a shorter-term horizon, persistent deficits and sticky inflation in the US make us more positive on fixed income elsewhere, notably Europe. We also still like quality income in short-term credit on a tactical horizon and short-term government bonds. We like long-term government bonds in the UK, where we think the Bank of England will cut rates more than the market is pricing given a soft economy. We also prefer European credit – both investment grade and high yield – over the US on cheaper valuations.
Strategically, we prefer short- and medium-term investment grade credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds in the US and euro area and UK gilts overall.
What’s your view on gold? There’s been a lot of interest in Gold ETFs in India – what’s your take on that? And how’s the global picture for gold looking?
The unstable correlation between stock and bond returns has made government bonds less reliable in cushioning equity selloffs. We see potential for other diversifiers, such as gold and bitcoin, to play a role. This is not about replacing long-term bonds to find diversification but instead seeking new and distinct sources of risk and return.
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Gold has surged as investors seek to bolster portfolios against higher inflation, and some central banks seek alternatives to major reserve currencies. We think it is key to monitor how the performance of these alternatives changes relative to traditional asset classes – and be nimble in using them.