Sugar stocks are frozen but India’s overcooked

Selling to China and buying to India has been a popular trade this year, but the Indian market is starting to look expensive

Chinese stocks’ terrible, not good, very bad year has been an impetus for India. But with soaring energy prices and India’s already overpriced market, buying now can be a mistake.

The country’s red-hot stock market contrasts sharply with its sluggish Chinese counterpart. Regulatory concerns and a slump in the property market have punished MSCI China in 2021 – the index is down 11%. This is compared with a 30% profit for MSCI India. The Indian market has probably benefited from investors fleeing Chinese and Hong Kong stocks for a larger Asian emerging market that still offers strong growth potential. Indeed, according to Goldman Sachs, India is one of the most heavily weighted markets for funds invested in emerging markets. The allocation to India for Asia-focused funds is 4.1 percentage points higher than India’s weighting in benchmark MSCI Asia ex-Japan.

Domestic investors are also joining in. The National Stock Exchange of India said it has over 50 million unique investors, and has added 10 million in the past half year. According to the Association of Mutual Funds in India, investments in regular mutual fund investment schemes touched a record $1.4 billion in September.

An Indian tech stock boom has also boosted sentiment, even though many tech stocks have yet to list. Several Indian unicorns – startups worth over $1 billion – are coming to the market soon, which will change the landscape of the Indian market and increase its weighting in the global index. At the moment, however, the stock market is still concentrated in financial, energy and IT outsourcers.

Corporate profits are also expected to strengthen in the coming quarters as the situation around Covid-19 improves. But most of that growth is already being priced in. According to Nomura, about 77% of the stocks in the Indian index are trading at higher than their pre-pandemic average valuations, compared to 41% for Asia East Japan, which downgraded Indian equities. in the weekends. According to Goldman Sachs, MSCI India is trading at around 24 times expected earnings for the next 12 months – a record premium over other Asian markets.

One potential risk is that rising inflation may push the central bank away from its neutral stance. Corporate margins may also be impacted by higher energy prices. India has long relied heavily on imported fossil fuels.

Given the trouble in China and growing concerns over the memory-chip price cycle in Asia, it makes sense to diversify into other Asian markets. But India’s market is already on a strong boil – especially given the threat from rising energy prices.

The investor might just take some money off the stovetop before it boils.