Why did Nuvama downgrade BFSI, upgrade IT & Reliance Ind? Find out here

According to the Nuvama report, the deflationary impulse from tariff-driven global slowdown is likely to hurt domestic cyclicals the most.

Nuvama portfolio pivot: In a major portfolio shift, analysts at Nuvama Institutional Equities (Nuvama) have downgraded the Banking, Financial Services and Insurance (BFSI) sector to Underweight (UW), while upgrading the Information Technology (IT) sector and Reliance Industries to Overweight (OW). The changes come amid growing concerns over global deflationary pressures, weakening domestic demand, and relative valuation resets across sectors.

 

The downgrade of BFSI follows a 12 per cent outperformance since its upgrade in March 2024. However, Nuvama now sees rising asset quality concerns, particularly in MSME lending, and believes the sector is increasingly vulnerable in the face of global trade disruptions. 

 

According to the report, the deflationary impulse from tariff-driven global slowdown is likely to hurt domestic cyclicals the most. “Concerns are now shifting from growth to asset quality,” the analysts wrote, warning that even a normalisation of credit costs could weigh considerably on profitability. While the top two private banks and insurance players remain relatively better placed, the broader BFSI outlook has weakened.

 

On the other hand, IT has been upgraded after underperforming by 22 per cent since its January 2025 downgrade. Nuvama noted that despite this underperformance, relative earnings have held up, and valuations have compressed meaningfully, making the risk-reward attractive. The sector is seen as a defensive play with global exposure—well-suited for a market where domestic demand remains weak and profit margins are stabilising. “2025’s underperformance has compressed relative valuations despite relative earnings differential holding up,” the report said.  ALSO READ | RIL's growth plans, Jio listing can lead to re-rating of its stock 

Reliance Industries has also been upgraded to Overweight from Neutral, with analysts citing value unlocking potential across its Consumer, Telecom and Internet verticals. The move reflects a preference for large-cap names with diversified earnings levers and strategic optionality.

 

These portfolio changes are underpinned by a broader shift in market dynamics. Nuvama argues that, going forward, global factors will have a greater influence on India’s equity earnings and capital flows than domestic variables. 

 

“In the last three years, equity earnings (upside and downside) have been domestic-driven. Hereon, global outlook shall shape earnings – amid stabilising profit margins and persistently weak domestic demand,” the note stated.

 

Exports, which contribute to nearly two-thirds of the BSE500’s top line, are expected to face pressure as the US current account deficit narrows (CAD) – a trend historically associated with slower global trade and weaker corporate earnings. Nuvama points out that during past episodes of CAD narrowing in 2008, 2010-12 and 2019, the earnings impact extended beyond export-linked sectors to domestic cyclicals like Autos, Industrials, Durables, BFSI and Real Estate. “The slowdown was not restricted to global trade/exports,” the report noted. “Earnings of even domestic cyclicals slumped – a fallout of export slowdown dampening corporate top lines, prompting cutbacks in capex and wages.”  ALSO READ | These 2 hotel stocks are a must-have as hospitality boom continues; details 

Flows are also turning more sensitive to external policy, with FIIs now acting as the marginal price setters amid rising equity supply and slowing domestic flows. While the Fed has cut rates by 100 basis points in 2024, US 10-year yields remain elevated. Nuvama warns that unless yields fall meaningfully – by 150-200bps as seen in previous cycles – emerging market flows, including into India, could stay under pressure. “Any delay by the Fed could weigh on EMs’ (including India) capital flows,” it added.

 

With earnings at an inflection point and global risks rising, Nuvama recommends a defensive portfolio stance with a preference for large-caps over small- and mid-caps. 

 

The brokerage’s sector positioning reflects a clear pivot toward resilient, globally leveraged businesses, and away from rate-sensitive domestic cyclicals that are now exposed to asset quality and margin risks.