Is it Time to Follow Global Brokerages and Book Profits in Indian Stocks?

Retail investors and domestic institutional investors (DIIs) have been in the front seat for the past 3-4 months, driving the rally in Indian share markets.

While foreign portfolio investors (FPIs) are selling big time, DIIs and retail investors are supporting the stock market.

As the retail driven rally has pushed Indian share markets to expensive valuations, several global brokerages have downgraded Indian equities.

One of these downgrades came from analysts at UBS citing expensive valuations with fading earnings momentum concerns.

Then there was Nomura which said it's seeing an unfavorable risk-reward given valuations, as most positives have been priced in.

The next downgrade came for Morgan Stanley which stated that India markets may take a breather for the next 3-6 months as expensive valuations limit returns.

Last week, there was one more downgrade from Goldman Sachs.

The latest to join this mix is CLSA Global, a Chinese institutional brokerage and research firm.

CLSA has called for booking profits in Indian share markets citing rich valuations, margin pressure and a high probability of earnings disappointment.

In the report, CLSA's analyst Alexander Redman gave 10 reasons to book profits. We are sharing here a thread from a Twitter account that shared this report...

Calling time on the 20-month rally, the brokerage has lowered exposure to India within its Asia Pacific ex-Japan portfolio to 40% underweight.

In a report titled "Indian equities: On borrowed time", CLSA said,

• Our concerns range from elevated energy and broader input price pressures applying downward pressure to margins, the current account balance and thus currency outlook, the withdrawal of RBI stimulus, and a lack of upside implied by Indian equities' typical macro drivers.

So far this year, India has been the best performing stock market in Asia. This was among the key reasons behind the downgrade.

Other reasons pointed out include rising energy prices, margin pressure, and withdrawal of RBI's stimulus.

The brokerage said Indian markets are trading at 31.6 times cyclically adjusted earnings, which is more than one standard deviation above its 18-year average of 22.6 times.

Surely the valuation ratios staying above their historical averages are a cause of concern.

Time to head out of Indian equities?

It must be noted that the brokerage community's predictions are sometimes notorious for being way off the mark. Any unexpected change throws all their analysis out the window.

And when these predictions are not met, they are quick enough to blame things around sectoral headwinds, and other reasons.

While the reasons in CLSA's note is justified, it's not something we don't know already.

So, what should you do in a situation when global brokerages are downgrading Indian equities?

With or without the downgrades, your answer should stay the same...sell your duds. Sell the ones with corporate governance issues and with deteriorating financials.

Co-head of Research at Equitymaster, Tanushree Banerjee has this to say if you are looking to sell stocks in this bull market.

Here's what she wrote in a recent edition of Profit Hunter:

Do check out our interview piece with India's #1 trader Vijay Bhambwani, where he talks about what's going to happen next in the markets...

And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...