Prabhudas Liladhar: Relative Valuations Favor Switch into India Mid-Caps

India Market Outperformance versus Emerging Markets
Unfolds, as Expected. Relative Valuations Favor Switch into
India Mid-Caps
Over the past several weeks, Indian equities have massively outperformed
their emerging market peers, in line with our outstanding views. Such
outperformance has been fueled by several considerations, including: (1)
global equities' strong performance in September; (2) global markets'
growing appetite for growth exposures, especially in geographies for which
the majority of growth is fueled by local demand dynamics, such as is the
case in India; (3) the acceleration of Asian currency strength these past few
weeks, led by the Chinese Yuan, partly in response to pressures exerted from
Washington. These dynamics have resulted in an intensification of capital
inflows into the Indian share market.
While short term gyrations can never be ruled out, it is our expectation that
India's ability in continuing to attract foreign capital inflows, including of the
portfolio variety, is likely to extend at least over the next two years. We
hold such benign outlook on the foreign capital backdrop facing the Indian
share market on account of two principal considerations: (a) our
longstanding view that policy rates in Europe and the USA are likely to
remain low for several more years, and (b) the market's growing appetite for
growth exposures fueled by local market dynamics - on that score, India
represents one, if not the one, single most attractive market globally for the
years to come.
Admittedly, signs of overvaluation in pockets of the Indian share market have
begun to surface, including but not limited to large cap consumer staples
stocks which trade on exceedingly elevated valuations. It is precisely
valuation considerations that lead us to recommend a shift in investor
positioning away from Indian large into mid-cap stocks