Shares of companies linked to Gautam Adani, India’s wealthiest individual, have experienced a significant decline following allegations made by a short seller, which Adani has vehemently denied. While the impact is primarily felt by the Adani Group, it also has broader implications for the Indian stock market.
Unfortunately, the selling momentum persisted on Monday, resulting in a substantial decline in the market capitalization of the seven companies within the Adani Group—approximately $64 billion, according to FactSet data. In fact, the downturn in Adani stocks appears to be impacting the wider Indian stock market, as highlighted by Gavekal Research. Since the report was released on January 24th, the MSCI India Index has dropped by 3.4%, while the MSCI Emerging Markets Index has observed a modest gain of 1.2%.
This situation becomes more significant considering that India outperformed emerging markets as a whole in 2022. The iShares MSCI India ETF (INDA) experienced a mere 9% decline last year, compared to the 21% drop in the iShares MSCI Emerging Markets ETF (EEM). Furthermore, Indian stocks trade at a premium relative to emerging markets, with the India ETF boasting a price-to-earnings ratio of 21.4 times compared to the Emerging Markets ETF’s 12.5 times, illustrating a valuation differential.
Given this discrepancy in valuation alone, investors may now reconsider their level of exposure to Indian stocks, advised Gavekal. Regardless of whether the allegations of fraud against the Adani Group prove to be true or not, Gavekal’s Udith Sikand predicts that they will prompt a closer examination of asset valuations in India.
It is worth acknowledging that situations like these tend to occur periodically in financial markets.
