Nomura downgrades India equities to 'neutral' over unfavourable risk-reward

Nomura has downgraded domestic equities from ‘overweight’ to ‘netural’ citing unfavourable risk-reward. The global brokerage is recommending reallocating funds to China and other ASEAN countries, which have underperformed India so far in 2021.

“We now see an unfavourable risk-reward given valuations, as a number of positives appear to be priced in, whilst headwinds are emerging. We, thus, downgrade India to neutral in our regional allocation and will look for better entry points given our still-constructive medium term view. We like China (significant underperformer seeing stabilising sentiment) and ASEAN (tactically laggard reopening play),” said Nomura equity strategists Chetan Seth and Amit Phillips in a note on October 23.

Nomura said India’s valuation appears “very stretched”. It highlighted that 77 per cent of domestic stocks in the MSCI index are trading higher than the pre-pandemic or post 2018 average valuations.

Nomura said most positives are “well known and appear priced in”. Some of the positive triggers include ramp up in vaccination rollouts, reopening of the economy and demand recovery.

The key risks facing domestic equities according to Nomura are policy normalisation amid sticky core inflation, elevated commodity prices and tentative signs of a slowdown in demand.

On October 20, UBS too had echoed similar sentiment. It says the Indian market has turned “unattractive” due to extremely expensive valuations relative to the ASEAN countries.

“India, like Taiwan, looks very poor on our scorecard framework. The relative valuation of India to ASEAN, two areas with similar growth dynamics and occasional perceived macro vulnerabilities, looks too wide to justify. We note that both in India and Taiwan, retail investors have played an outside role, which while difficult to predict in terms of reversing, creates an additional potential headwind if this demand unwinds,” said the brokerage, which has an underweight stance on India.

On Monday, the benchmark indices traded lower for a fifth straight session.

Asian peers have been catching up on some underperformance vis-à-vis Indian equities. Last week, benchmark Nifty posted its first weekly underperformance to the Asian market gauge in six weeks. Notably, the Nifty has outperformed the MSCI Asia Pacific index in 21 out of 26 weeks since May.