So far in the year, Japan’s Nikkei has rallied 22.5% in USD terms, China’s Shanghai Composite has gained 21.4%, and even Brazil’s Bovespa has rocketed 38.5%, leaving India’s vaunted growth story in tatters amid four consecutive quarters of muted earnings growth.
An analysis of year-to-date returns across major global markets reveals the depth of India’s underperformance. The Nifty 50’s marginally better 3.2% return still places it among the bottom three performers, with only Thailand’s SET index (2.8%) providing any company at these dismal levels.
The valuation picture makes the performance gap even more glaring. While India trades at expensive forward multiples of 19.3 times for Nifty, outperforming markets like Korea (10.4x), Brazil (8.3x), China’s Shanghai (13.5x) and Hang Seng (11.3x) offer significantly cheaper entry points for global investors.
“Domestic indices have underperformed most of the global indices due to deceleration in earnings growth beginning Sept-24 qtr coupled with relatively expensive valuations,” Sunny Agrawal, Head of Fundamental Research at SBI Securities, told ET Markets. “FY26 is likely to deliver single digit earnings growth with likely recovery to 12-14% during FY27.”
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Foreign institutional investors have turned their backs on India’s premium valuations amid the earnings slowdown. Shrikant Chouhan, Head Equity Research at Kotak Securities, highlighted the stark valuation disparity: “Indian equities are trading at around 19 times one-year forward earnings and 22 times trailing twelve-month earnings. When we benchmark these valuations against other key emerging markets, such as China, Indonesia, Thailand, and Korea, we find that these markets are still trading at considerably cheaper valuations, often below 13 times forward earnings.”So far in the calendar year, FIIs have pulled out Rs 1.4 lakh crore from Dalal Street and have been reallocating some investments to other countries.
“The persistent FII selling trend over the past year can largely be attributed to two primary factors: superior performance of developed markets and currency concerns. FIIs are reallocating capital to their home markets and other developed economies where returns have been more attractive relative to emerging markets. The Indian rupee has weakened relative to major global currencies,” Chouhan explained.
Political uncertainty has added to the market’s woes. “Populist measures adopted during the beginning of 3rd term by the government and pursuant slowdown in government capex also deteriorated market sentiments. Global uncertainties led to flight of capital to safe haven,” Agrawal noted.
The narrow trading range reflects investor apathy. “The market has remained confined to a narrow range, with Nifty fluctuating between 24,000 and 25,000 levels. This consolidation phase has contributed to the market appearing relatively expensive at current valuations, especially in the context of subdued earnings momentum,” Chouhan said.
Yet analysts see potential catalysts for a turnaround. Neeraj Chadawar, Head of Fundamental and Quantitative Research at Axis Securities, believes the worst may be behind India: “This year is shaping up to be more of a consolidation year — markets are essentially moving in line with earnings growth. The upcoming Q2 earnings season is likely to be in a similar line to Q1; meaningful activities are likely to be visible in the second half of the current fiscal year.”
Policy support is building momentum. The recent GST rate cuts and expectations of monetary easing provide hope. “There is a growing anticipation of additional policy actions that could support the market. CRR cut by the RBI, which would release liquidity into the system and potentially lower interest costs for businesses and interest rate cuts expected in the next 2 to 3 months,” Chouhan said.
The earnings recovery timeline appears crucial. “Starting from Q3FY26, the transmission of fiscal and monetary benefits and reforms announced in the last 6-12 months are likely to be visible in corporate earnings. With this positive trigger, FIIs are likely to return to the domestic market in the second half of the current fiscal year,” Chadawar predicted.
For now, defensive strategies dominate. Given the current market scenario, where earnings remain subdued and valuations appear stretched, analysts suggest investors to focus on value-oriented investment strategies rather than chasing high-growth stocks.
The road to redemption hinges on two key factors. “If the two upcoming events – 1) tariff negotiations aligning with market expectations without further deviations, and 2) the transmission of fiscal and monetary benefits translating into stronger economic momentum and earnings growth for Indian corporates from Q3 FY26 onwards – play out as anticipated, the market is likely to scale to a new high in the upcoming quarters,” Chadawar concluded.
Despite strong macroeconomic fundamentals with GDP growth above 7.5% and inflation contained at around 2%, India’s equity markets remain trapped in a valuation-earnings mismatch that has relegated the former emerging market darling to global pariah status. Whether the second half revival materializes will determine if India can stage one of the most dramatic comebacks in market history – or remain mired at the bottom of global performance tables.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
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