Nomura downgraded Indian markets to neutral from overweighting due to an unfavorable risk / reward ratio given the high valuations as a number of positives appear to be on board as headwinds set in. are emerging. Instead, the Japanese brokerage firm prefers China and ASEAN and will seek better entry points for India.
In February of this year, Nomura put India overweight, citing local factors such as tax activism and declining cases of covid-19.
“However, we believe that these positives are now adequately reflected in current valuations – which look rich not only in absolute terms but also in relative terms. Even on a two-year futures price / earnings (PE) basis ( incorporating India’s strong earnings outlook), India is trading at a record high premium to regional markets, ”said Chetan Seth and Amit Phillips, analysts at Nomura.
At the equity level, nearly 77% of Indian stocks on the MSCI index are trading above the pre-pandemic or post-2018 average valuations, forcing Nomura analysts to downgrade, Nomura said. .
Emerging headwinds in India in the form of policy normalization amid persistent core inflation, high commodity prices that will likely also add to short-term price pressures and weigh on the economy. growth, provisional signs of a slowdown in consumer demand worry Nomura analysts,
Another short-term risk to watch out for is a likely reversal in the retail boom once they return to work and interest rates rise.
However, in the medium term, Nomura continues to love India with positive elements such as a strong listed corporate sector and a growing number of new economy oriented companies generating high and sustainable profit growth likely to outperform the market. regional growth rates.
Even though Indian markets have outperformed their global peers this year so far, analysts and fund managers are uncomfortable with expensive valuations.
Markets appear to be losing the support of institutional liquidity this month. Foreign Institutional Investors (FIIs) have sold Indian stocks for $ 41.77 million in October so far, after a net inflow of $ 1.84 billion in the previous two months. Domestic institutional investors also dumped stocks worth ??5,986.21 crore this month.
This follows, with UBS noting that India is the least attractive as valuations rise as earnings momentum falters while there is less scope for an economic rebound this year. UBS is underweight India due to “extremely expensive” valuations.
The monthly BofA survey released last week also showed the least optimism among global fund managers since October last year. He said fund managers are underweight emerging markets and want to reduce their exposure over the next 12 months as concerns from China weighed on sentiment.
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