Indian equity returns likely muted for remainder of the year, says Nomura

The Japan-based brokerage said the surge in retail flows into domestic mutual funds over the years has been driven by structural factors like under-allocation to equities

The returns from Indian equities are likely to remain muted for the rest of this year, according to Nomura.

The brokerage expects the benchmark Nifty to end 2024 at 24,860, which translates to a 2.2 per cent gain from the current levels.

The Nifty, which ended Thursday's session at 24,316, has rallied almost 12 per cent this year.

The Japan-based brokerage said the surge in the retail flows into domestic mutual funds (MFs) over the years has been driven by structural factors like under-allocation to equities, shifting from traditional asset classes, and easier access to information and investing.

“Data from Amfi shows that $155 billion of funds have been invested by local investors into domestic equity MFs since the start of 2014. We have long argued that the reason for optically low foreign equity holdings in India in per cent terms is that domestic investors have crowded out foreign portfolio investor flows given the latter cohorts' greater sensitivity to valuations," the brokerage said in a recent note.

Investors from emerging markets or Asia funds are still underweight on India and India-dedicated foreign domiciled funds are powerful pillars of flow support for Indian equities.

"Despite the occasional hiccups, the Indian market has shown remarkable resilience, bouncing back from the election scare. It's a market driven by narrative and flows," said Saion Mukherjee, managing director and head of equity research at Nomura.

Mukherjee said there has not been enough paper to absorb the inflows into the market.

"Primary market activity has picked up, but it is nowhere near what we saw in FY22. And it's getting pumped into the secondary market, which is lifting the valuations. We see insiders monetising by booking profits through block deals, promoter selling, and private equity exits gaining momentum," said Mukherjee.

Mukherjee said the IPO activity, when it revives, could absorb the liquidity and help temper the markets.

"We have the Hyundai IPO coming up. Many more could follow as the valuation gap between India and the rest of the world is significant across sectors," said Mukherjee.

On corporate earnings, Mukherjee said they are surprising on the upside after a while.

"Historically, we have always seen earnings disappointment, but at the moment, earnings are strong. There is no visible catalyst, which could bring down the markets. At some point, the valuations will start getting important. We are talking about a pause from here with about a 2-3 per cent gain for the Nifty from the current levels,” he said.

Mukherjee said domestic flows are likely to be sustained as the concept of equity investment is well sold, but foreign investors are concerned about valuations.

“They may be more keen on other markets and themes that are doing well. Considering the valuation differences, FPIs may not be in a hurry to return to India,” he added.