Invesco: Positive and constructive view on Indian stocks; valuation pullback makes them more attractive

Recently, Invesco's chief investment officer (Asia (excluding Japan)) Mike Shiao and investment director Chandrashekhar Sambhshivan wrote that, with policy continuity and stability, a resilient macro economy, abundant domestic capital inflows, and strong economic growth, Invesco is positive and constructive on Indian stocks. Invesco believes that the current valuation makes Indian stocks more attractive for investors seeking opportunities in the Indian market.

Indian stocks have outperformed most emerging markets in recent years, with positive performances across all sectors. However, after the recent market correction, Indian stocks have become more attractive due to the decline in valuations, which was partly due to profit-taking, geopolitical developments in the Middle East, and the upcoming US presidential election. From a valuation perspective, Indian stocks (represented by the MSCI India Index) are currently trading at a level below one standard deviation from the past five years. Mid-cap stocks with strong fundamentals and higher earnings visibility have also experienced corrections, making the current valuations more reasonable than a few weeks ago.

Invesco noted that Indian companies' earnings per share growth is strong, significantly outperforming most developed economies and some emerging markets such as Thailand, Indonesia, and Brazil. The current earnings season in India is ongoing, and the latest released earnings remain robust.

The MSCI India Index's return on equity (RoE) reached 16.9% in fiscal 2024, a 13-year high, indicating increased investor returns. As Indian companies' RoE has transitioned from low double-digit levels to mid-double-digit levels in recent years, it is expected to achieve higher and more sustainable RoE in the future.

Moreover, Indian companies have effectively managed their balance sheets over the past decade, maintaining low leverage and benefiting from domestically driven growth. The MSCI India Index's debt ratio (total debt divided by total assets) has significantly improved, from 28% in 2019 to 21.2% in the third quarter of 2024. The free cash flow-to-sales ratio has also increased significantly, now above the long-term average. Invesco expects the companies' balance sheets to continue to strengthen.

On the liquidity front, Indian stocks remain strong, benefiting from robust domestic liquidity and inflows from foreign institutional investors. The trend reflects high confidence in the Indian economy and market, a positive structural inflow that is likely to continue.

Invesco said that Indian stock valuations are falling to more attractive levels. Considering the strong fundamentals and macro stability that can support Indian stock valuations, there is still room for further upside.