Indian equities have had a stellar rally over the past year and a half. The benchmark Nifty has gained over 45 per cent from the August 2013 lows. Hopes of a speedier economic recovery and low interest rate regime, coupled with a change of guard at the Centre, bolstered investor confidence in the Indian market. However, the rally in stock prices was not backed by growth in earnings for India Inc.

This led to a sharp jump in the market’s valuation (price-earnings) multiple. From less than 15 times in May 2013, Nifty’s price-earnings (P/E) multiple has expanded to about 21 times now. So, is India now the priciest market in the global context? No, reveals an analysis of PEs across leading developed and emerging markets across the globe.

Pricey indices Italy tops the list of expensive markets. Borsa Italiana’s benchmark, FTSE MIB Index, currently trades at a whopping 78 times its trailing twelve month earnings. However, this is less than a fifth of the massive 412 times it traded two years ago. This was thanks to the good 37 per cent earnings growth in 2014, compared to the previous year. Though the Italian benchmark appears expensive from a price-earnings basis, surprisingly, its enterprise value is barely a sixth of its operating profit (EV/EBITDA). Higher interest outgo on borrowings and depreciation on assets possibly ate into profits, making it expensive on the basis of price-earnings multiple.

Brazil’s IBovespa Index was a distant second, trading at over 32 times its twelve month earnings. The Brazilian Index’s multiple has fallen from about 278 times two years back to 32 times now. This was on a strong 33 per cent jump in earnings in 2014.

Closely following the Brazilian benchmark is Mexico’s IPC Index. The country’s equity markets have been on a high since December 2012, when Enrique Pena Nieto took charge as Mexico’s President. The IPC Index has witnessed significant re-rating over the last two years — from about 22 times in May 2013 to about 31 times by May this year. Also, lacklustre profit performance by the stocks which constituted the index was responsible for the higher price-earnings multiple. The aggregate earnings for the index slipped by nearly 15 per cent in 2014.

The US ranks foremost among the developed markets that have had a good run in the last two years. Thanks to the nearly 50 per cent rise in Nasdaq Composite Index during this period, the index trades at almost 30 times its trailing earnings, higher than the 25 times, two years ago.

Value picks But not all the emerging markets are currently pricey on an earnings basis. For instance, the valuation of Hong Kong’s Hang Seng Index, which is the cheapest among the leading emerging and developed market indices, has not changed much in the past two years. From about 10 times in May 2013, its price-earnings multiple has remained largely unchanged at about 11 times as of May 2015.

Despite the strong rally in Chinese stocks, the valuation for its benchmark Shanghai SE Composite Index has not turned frothy yet. Having more than doubled since May 2013, Shanghai SE Composite Index traded at about 25 times its trailing twelve month earnings as of May 2015.

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