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India’s Equity Market Mid-Year Report: Growth Potential Amid Valuation Jitters

At the halfway mark of 2025, India’s stock market finds itself in a moment of pause and reflection. Once considered a star performer in global equities, Indian indices have cooled compared to their regional peers, with investor sentiment shifting from exuberance to tempered optimism.

Performance Snapshot: India Trails Behind Regional Peers

The MSCI India Index, tracking 157 large- and mid-cap Indian stocks, has returned a modest 5.68% year-to-date — significantly underwhelming when compared to the MSCI Asia Pacific Index, which is up nearly 12.5%.

India’s Nifty 50, the benchmark index composed of 50 blue-chip companies, has performed slightly better, advancing 8% so far in 2025. But it still lags behind:

• South Korea’s Kospi, which has surged 29.4%
• Hong Kong’s Hang Seng Index, up 19.6%

Six months ago, analysts had anticipated challenges for Indian equities — citing high valuations, an earnings slowdown, and geopolitical shifts like U.S. tariff hikes under President Donald Trump. These predictions have largely played out.

From Boom to Balance: Shifting Market Sentiment

“Indian markets peaked in September last year, corrected until February, and have since rebounded — but earnings growth has not kept pace,” says Pramod Gubbi, co-founder of Marcellus Investment Managers.

Indeed, quarter-on-quarter earnings have weakened, raising concerns about the sustainability of current valuations. Indian companies are struggling to maintain profit growth in an environment where inflationary pressures, rising input costs, and global macro volatility are eroding margins.

The Valuation Conundrum

According to Vivek Subramanyam, founder and CEO of TH Global Capital, the Nifty 50 is currently trading at a 60% premium to the Hang Seng Index and a 70% premium to other emerging Asian markets. That gap has triggered fears that India may be overvalued — especially when other regions like Taiwan and Southeast Asia offer:

• Lower price-to-earnings (P/E) multiples
• Stronger short-term growth indicators
• More favorable demographic tailwinds

Yet, Subramanyam notes that India’s Earnings Per Share (EPS) for listed companies is projected to grow 15–17% annually by 2026 — nearly double that of Hong Kong's.

What Could Tilt the Balance? Trade Deals and Policy Signals

Subramanyam adds that an expected India-U.S. trade agreement could accelerate growth in the second half of 2025. If the deal leads to a reduction in India’s protectionist stance, especially in sectors like manufacturing and defense, we could see market gains of 9–10% in H2 2025.

However, DBS economist Radhika Rao cautions that such a deal is unlikely to immediately open up India’s agriculture sector, a traditional sticking point in trade talks. Meanwhile, Sanjay Mathur, ANZ’s chief economist for South Asia, points out that trade isn’t the primary engine of India’s economy — making the deal a “nice to have,” not a “need to have.”

Strategic Investing: What to Look For in Indian Equities

Both Subramanyam and Gubbi agree that stock picking will be crucial in the coming months.

Subramanyam favors companies with predictable revenue streams, such as Home First Finance, which provides housing loans to lower- and middle-income households — a sector underpinned by India’s young, urbanizing population.

Gubbi, on the other hand, is bullish on firms with strong cash reserves, which can invest in innovation, advertising, or workforce productivity — moves that could lead to superior earnings over time.

While small caps have attracted more retail investor flows recently, flexi-cap mutual fund managers are shifting allocations back to large caps, given the more reasonable valuations.

Gubbi’s investment strategy is bottom-up, focusing less on sector or size, and more on fundamentals, management quality, and long-term return on equity (ROE).

Tech Sector: India’s Internet Economy Attracting New Bets

Kevin Carter, founder of EMQQ Global, believes India is becoming increasingly attractive for global investors looking beyond U.S. tech.

“India has a larger population than all other emerging markets combined — excluding China — and is the fastest-growing consumer economy,” Carter says. With rising internet penetration, digital public infrastructure, and tech-savvy leadership, the ecosystem is ripe for growth.

His portfolio includes:

• Eternal (parent of Zomato) – Online food delivery
• Ixigo (Le Travenues Tech) – Online travel
• Info Edge – Job search, real estate, and matrimony platforms

These firms are still in the early stages of revenue scaling but are seen as future market leaders as India's digital economy matures.

Carter believes that as macro uncertainty affects U.S. tech — particularly the “Magnificent Seven” stocks — capital rotation into emerging markets like India could accelerate.

Long-Term Outlook: India Is Not a Sprint, It's a Marathon

Despite recent underperformance, the consensus among experts is clear: India remains a long-term investment story.

“Trying to predict short-term market movements is not only hard — it’s often futile,” Gubbi notes.

Carter echoes that sentiment. “India checks all the boxes — population size, favorable demographics, digital infrastructure, and consumption potential. It’s the kind of market you want to stay invested in for the next two decades.”

Final Thoughts:

India’s stock market story is still being written. It may not be the runaway performer of the year so far, but its long-term fundamentals remain solid. With prudent stock selection, sector focus, and macro patience, investors could see India as a core holding — not just for 2025, but for the next generation.

Now is not the time to chase momentum — it’s the time to invest with vision.