Investor sentiment towards Indian equities has improved even as it deteriorates for Chinese equities. As a result, the share of the MSCI Emerging Markets index represented by MSCI India has risen to nearly 20%, while that of MSCI China has dropped from 43% to 24%. This change has gone well beyond the underlying earnings trend.
Net income expectations for Indian equities have also improved, but by nowhere near as much as have equity prices. For Chinese equities, profit expectations have fallen, but by less than the overall market value.
The explanation for the divergence? Valuations. The forward price-earnings ratio for Indian equities has increased significantly, by nearly 50% relative to the decade prior to the Covid pandemic. Valuations for Chinese equities, by contrast, have declined by nearly 10%.
