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Global analysts are sounding the alarm on India’s equity performance. They are becoming uncomfortable about steep valuations and hence are cautious about allocation of funds despite India outperforming global peers in 2021 so far. Mint explains:

Why has Nomura downgraded India?

Nomura has downgraded Indian markets to neutral from over-weight rating citing unfavourable risk-reward because of high valuations. A number of positives appear to be priced in, it said, even as headwinds emerge. The Japanese brokerage prefers China and Association of South-East Asian Nations (ASEAN), instead, and will be looking for better entry points for India. In February this year, Nomura upgraded India to overweight, citing fiscal activism and declining covid-19 cases. Almost 77% of Indian stocks in the MSCI index are trading higher than pre- pandemic or post 2018 average valuations.

Are Indian equities no longer attractive?

Last week, UBS reiterated its underweight rating on India calling it ‘extremely expensive’. UBS finds Indian equities unattractive because of higher valuations. The earnings momentum, meanwhile, is losing steam and an economic rebound this year looks unlikely. Global fund managers are no longer bullish on emerging markets, showed a BofA survey. It said fund managers are underweight on EMs and want to cut exposure in the next 12 months as China fears weighed on sentiment. Global fund managers’ allocation to EM equities in October slumped to the lowest since September 2018.

Steep valuation
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Steep valuation

How is this going to impact liquidity?

Markets seem to be losing institutional liquidity support this month. Foreign institutional investors have sold Indian shares worth $41.77 million in October so far after a net inflow of $1.84 billion in the previous two months. Domestic institutional investors have dumped equities worth 5,986.21 crore this month so far.

Are Indian valuations really steep?

The Sensex is currently available at a one-year forward price to earnings (PE) of 23.62 times, whereas the Nifty is at 22.28 times. In comparison, the MSCI World is trading at 19.22 times and the MSCI Emerging Markets at 13.02 times. However, the Sensex and the Nifty have gained 28-30% in 2021 so far against a 17% jump of the MSCI World and 0.46% of the MSCI EM. The number of companies trading at a PE higher than 25 times has risen from 11 in March 2020 to 25 in September 2021.

Are markets ahead of fundamentals?

Headwinds in India such as policy normalization amid sticky core inflation, elevated commodity prices, and tentative signs of a slowdown in consumption are worrying, said Nomura. Another near-term risk is a likely reversal in retail ebullience once back-to-work normalizes. India may not look that steep if we compare earnings yield to bond yields, said Unmesh Sharma, head of institutional equities, HDFC Securities. “There is some discomfort on the aggregate level of valuations, but we believe there are opportunities in the market."

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