Nomura has downgraded Indian markets to neutral from overweight citing unfavourable risk-reward given high valuations, with a number of positives priced in even as headwinds are emerging. Instead, the Japanese brokerage firm prefers China and Asean and will be looking for better entry points for India. Nomura upgraded India to overweight in February, citing local factors such as fiscal activism and falling covid-19 cases.

“However, we think these positives are now adequately reflected in current valuations – that appear rich not only on absolute basis but also on relative basis. Even on two-year forward price-to earnings (PE) basis (incorporating India’s strong earnings outlook), India is trading at record high elevated premium relative to regional markets,” said Chetan Seth and Amit Phillips, analysts, Nomura.

At stocks level, almost 77% of Indian stocks in the MSCI index are trading higher than pre- pandemic or post 2018 average valuations, compelling Nomura analysts to downgrade, it said. Nomura analysts are worried about emerging headwinds in India in the form of policy normalization amid sticky core inflation, elevated commodity prices which may also add to near-term price pressures and weigh on growth, and tentative signs of a slowdown in consumption demand.

Another near-term risk to watch out is a likely reversal in retail ebullience once back-to-work becomes widespread and a hike in interest rates. However, in the medium term Nomura continues to like India with some positives such as a strong listed corporate sector and increasing number of firms geared to the new economy that generate high and sustainable earnings growth likely to outperform regional growth rates.

While Indian markets have been outperforming global peers this year so far, analysts and fund managers are wary of expensive valuations. Markets seem to losing institutional liquidity support, with foreign institutional investor selling Indian shares worth $41.77 million in October.

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