Industry sources note that despite recent run-ups in equity valuations, certain sectors remain undervalued and may benefit from Prime Minister Narendra Modi’s push to liberalise foreign investment rules.
Sanjiv Duggal, head of Asian and India equities at HSBC Global Asset Management, told Fund Selector Asia that India's stock market has recovered from the third quarter global equity correction, though valuations still generally look expensive. Equities are trading at 17x forward price-to-earnings versus 9x for China equities.
But the price-to-earnings of India's state-owned enterpises is 7.5x while China's is 8x. SOEs make up only 18% of the market capitalisation in India and 78% in China.
Source: Credit Suisse, Wind, Bloomberg, Thomson Reuters as of 25 September 2015
He is overweight both government-linked and technology sectors in India.
In government-linked sectors, Duggal pointed out that the financial and energy segments are worth paying attention to as their earnings have kept pace with their stock prices.
Despite comparatively high Indian equity valuations, domestic demand in the country remains strong due to the continuous expansion of the middle-class, according to a note by BSI Bank.
The lender said that consumer sentiment remains healthy and predicted that the country's 2015 GDP growth would be 7.0-7.5%.
“The country’s fiscal deficit is under control, there is a significantly narrower current account deficit, the country’s currency is stable, and falling inflation leaves room for interest rate cuts,” BSI Bank noted.