Why is India lagging behind other emerging markets since 2024? Geojit's Vinod Nair explains

Mint

2 days ago

A common investment strategy suggests that an investment in a stock or region-wise is based on three important factors made of growth, risk, and valuation. Typically, a significant portion of FII investments is concentrated in the developed countries, due to lower risks such as economy maturity, political structure, industrial policy, and currency reliability. Additionally, these regions offer better stock opportunities due to their large feasible business models, stable economies, and efficient financial accessibility.
For example, a highly followed and recognised world equity index, the MSCI World Index, focuses exclusively on developed markets, a key tool for investors and fund managers as a benchmark. The index currently includes 23 developed markets: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK, and the US, with the US market accounting for over 70% of the total weight.
The Index does not include any emerging market countries. Consequently, FIIs predominantly invest in these developed countries. And when volatility is high, institutional investors would follow developed markets.
FIIs also invest in emerging markets (EMs) to diversify their portfolios, seeking high growth opportunities, to outperform the benchmarks, or when developed markets present limited opportunities or high valuations. A key benchmark like MSCI EM, currently includes stocks from companies located in 24 countries. This index includes Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. Notably, China, India, and Taiwan collectively represent over ~65% of the index's total weight, underscoring their significance within the EM investment landscape.
The relevance of India has been increasing since 2020; the weightage has grown from 8% to about 18-20% currently. Simultaneously, the performance of MSCI-India has been solid, with a dollar-based return of 20% on a 5-year basis. This performance surpasses MSCI-EM (6%), MSCI-China (-1%), and MSCI-Ex Japan Asia (6%).
However, India's performance has lagged behind other EMs since September 2024. This is because of the premium valuation of India, which it has sustained for a long period, driven by a consistent increase in index weight and strong earnings growth. Both the factors decelerated during 2024 when India's weight peaked around 20%, which marginally moderated lately, and as domestic earnings downgraded in FY25 due to high global inflation and a slowdown in domestic economy.
At the start of 2025, MSCI-India was trading at a 90% premium to MSCI-EM, which is 20% higher than the 5-year average of 75%. India's one-year forward P/E ratio stood at 22.3x, significantly higher than the EM average of 11.7x. A key reason for India to trade at such a high premium is being the only large economy growing at a stable real growth rate of 6 to 7 per cent, political stability, structural demography, upcoming sectors like technology & manufacturing, and a progressive industrial outlook. However, as India's earnings growth began to decline after a good 3-4 years, other EMs experienced a revival driven by government financial stimulus, advancements in AI, and a resurgence in the manufacturing sector, particularly benefiting China, South Korea, and Taiwan.
EMs became more attractive during the late 2024 and early 2025 period, prompting a shift from India to EM investments. FIIs net sold ~ ₹ 1,850 billion between October 2024 and July 2025. However, this trend is expected to reverse in the coming months as the valuation gap with EMs has reversed below the 5-year average to 68%. Importantly, earnings growth is showing signs of revival, with the last two quarters reflecting a broad corporate earnings growth of 10–12% YoY, compared to stagnation in calendar year 2024. We can expect the performance of India to improve as earnings are able to sustain the traction going ahead.
This is expected to support the domestic market, as DII buying remains strong and retail investor participation is rebounding following recent profit-booking trends. In the near-term, the uncertainty is around the faltering discussion between the US-India trade deal, influencing FIIs to hold a cautious position.
The author, Vinod Nair, is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.