India’s mid and small cap stocks among world’s most expensive, says Ruchir Sharma

“Because you have this very robust flow of domestic money going into Indian mutual funds and the Indian asset management industry, the valuations of the Indian market remain very high, especially the mid- to small-cap stocks,” Sharma told Bloomberg News.

According to Sharma, Indian mid- and small-cap companies are trading at around 25 to 30 times earnings, potentially making them among the most expensive such segments globally.

Domestic flows keep valuations elevated

Sharma said the strong flow of domestic money into Indian equities is an important factor behind elevated valuations. With domestic investors continuing to allocate money to mutual funds, there is a persistent source of demand for Indian stocks.

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For foreign investors, however, high valuations can make India less attractive compared with other markets.

“As a foreign investor, why do I have to do this? I can go somewhere else, get a better valuation and better earnings growth in the middle of an AI boom,” Sharma said, according to Bloomberg News.

The valuation gap has contributed to a divergence in investor sentiment. Sharma said foreign investors are largely indifferent towards India, which could normally be viewed positively from a contrarian perspective. However, he argued that elevated valuations complicate that picture.

India’s domestic and foreign investor divide

The contrast between domestic and overseas investors is particularly visible in the mid- and small-cap segments, where valuations have remained substantially higher than in many other markets, Sharma said.

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He described the situation as one where domestic investors continue to support the market while foreign investors have greater flexibility to seek opportunities elsewhere.

Sharma’s assessment forms part of a broader 10-rule framework he uses to evaluate emerging and frontier markets over a three- to five-year horizon. The framework considers factors including demographics, politics, state intervention, debt, investment, inflation, geography, billionaire wealth, currency and investor sentiment.

India receives positive assessments on areas such as demographics and inflation, while investment and sentiment are more mixed. Sharma also flagged regulatory intervention and weak intraregional trade as concerns.

On currency, Sharma said he is less concerned than he was a few years ago and believes the rupee could enter a period of relative stability, barring a major macroeconomic shock.

Overall, Sharma’s assessment presents a mixed picture for Indian equities: strong domestic flows and favourable demographic trends coexist with elevated valuations and weaker foreign investor enthusiasm.

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