Nomura downgrades Indian markets to neutral due to high valuations

Nomura has downgraded Indian equities from 'overweight' to 'neutral' due to unfavourable risk rewards and high valuations, raising doubts over India's equity performance. Nomura said that while the upside is already priced in, headwinds are emerging that could pose risks in the future. It recommended allocation to China and other ASEAN countries that have underperformed India in 2021.

Stating that the valuations look very stretched, Nomura said that 77% of domestic stocks in the Morgan Stanley Capital International (MSCI) index that provides investment data and analytics services to investors are trading higher than pre-pandemic or post 2018 average valuations.

Nomura said that elevated commodity prices, sticky core inflation and tentative signs of a slowdown in demand, as risks that India faces. Some of the positive triggers include ramp-up in vaccination rollouts, reopening the economy, and demand recovery. Last week UBS gave India an 'underweight' rating, calling it 'extremely expensive.'

In February 2021, Nomura upgraded India to overweight due to post second wave economic recovery. The Sensex hit an all-time high of 62,245 on October 19, 2021; it has declined by over 1,400 points or 2.3 per cent since then.

The Sensex is currently at a one year forward PE of 23.62 times, while the NIFTY is at 22.28 times. In comparison. MSCI World is trading at 19.22 times and MSCI emerging markets at 13.02 times. NIFTY has outperformed the MSCI Asia Pacific index in 21 out of 26 weeks since May.