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Nomura has downgraded Indian markets to neutral from overweight rating due to unfavourable risk-reward given high valuations, as a number of positives appear to be priced in, while headwinds are emerging. Instead, the Japanese brokerage firm prefers China and ASEAN and will be looking for better entry points for India.

In February this year,  Nomura had upgraded India to an overweight, citing local factors such as fiscal activism and declining covid-19 cases.

 “However, we think these positives are now adequately reflected in current valuations – that appear rich not only on absolute basis but also on relative basis. Even on two-year forward price-to earnings (PE) basis (incorporating India’s strong earnings outlook), India is trading at record high elevated premium relative to regional markets," said Chetan Seth and Amit Phillips, analysts, Nomura.

At stocks level, almost 77% of Indian stocks in the MSCI index are trading higher than pre- pandemic or post 2018 average valuations, compelling Nomura analysts to downgrade, said Nomura.

Emerging headwinds in India in the form of policy normalization amid sticky core inflation, elevated commodity prices which will likely also add to near-term price pressures and weigh on growth,  tentative signs of a slowdown in consumption demand are worrying Nomura analysts,

Other near-term risk to watch out is a likely reversal in retail ebullience once back-to-work and  hike in interest rate.

However, in the medium term Nomura continues to like India with some positive like strong listed corporate sector and increasing number of companies geared to the new economy that generate high and sustainable earnings growth likely to outperform regional growth rates.

Even as Indian markets have been outperforming global peers in this year so far, analysts and fund managers are not comfortable with the expensive valuations.

Markets seem to losing institutional liquidity support this month. Foreign institutional investors (FIIs) have sold Indian shares worth $41.77 million in October so far after a net inflow of $1.84 billion in previous two months. Domestic institutional investors also have dumped shares worth 5986.21 crore in this month.

 This follows, UBS noting India to be least attractive as valuations are rising with fading earnings momentum while there is less scope for economic rebound this year. UBS has an underweight rating on India due to ‘extremely expensive’ valuations.

The monthly BofA survey released last week also showed least bullishness among global fund managers since October last year. It said fund managers are underweight on emerging markets and want to cut exposure in the next 12 months as China fears weighed on sentiment.

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