Upbeat earnings bolster case for India stocks as Asia wavers

Indian equities are gaining an edge in Asia, supported by stronger earnings and a return of foreign investors, making a strong case for further outperformance. Profits at around two-thirds of BSE 100 companies that have reported results rose by 20% in the September quarter, according to Citigroup Inc. This marks the fastest growth in at least five quarters and surpassed market estimates, the brokerage noted.

Consumer staples, steel, and financials were among the sectors that received earnings upgrades. This positive trend has brought India's $5.1 trillion market back into investors' radar, following rich valuations, record foreign outflows, and limited exposure to the artificial-intelligence trade, which dampened sentiment. Since October 1, the Nifty 50 has risen by 6% through Wednesday, while the MSCI Asia Pacific Index has fallen by 7.5%.

Some analysts believe the outperformance could continue if earnings upgrades spread and foreign inflows increase. Rajat Agarwal, an Asia strategist at Societe Generale SA, described India as a "pocket of resilience" in the region, given that earnings have been "reasonably good" at a time when valuations have become less demanding, making India a "pocket of resilience" in the region, said Rajat Agarwal, an Asia strategist at Societe Generale SA.

Foreign investor selling is also receding, with overseas investors acting as net buyers of local shares for the past three weeks, after withdrawing over $30 billion this year. If flows accelerate, it could further boost the recent momentum, particularly if concerns over the AI trade and the Democrats' strong US midterm results prompt a shift of capital toward markets like India. Agarwal added that there is "easing competition for capital for India."

However, risks persist. High oil prices pose a significant challenge for an economy that heavily relies on energy imports. Rising energy costs could fuel inflation, squeeze profit margins, and weaken the rupee, which had been close to a record low last month. Unless these pressures ease, India's local shares might struggle to sustain the rebound, even if they remain relatively resilient compared to other markets.

Despite the weak pace of earnings upgrades, with the 12-month forward earnings-per-share estimate for Nifty 50 members rising by only 1.6% during the current reporting season, compared to over 5% for MSCI's regional gauge, the improvement in earnings has broadened enough to strengthen the bullish case for India amid growing worries about the crowded AI trade. Citi analysts Surendra Goyal and Vijit Jain highlighted this in a recent note.