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Explained: What Nomura’s equity downgrading signals

Nomura has downgraded Indian equities from ‘overweight’ to ‘neutral’ as it feels that while the upside is priced in, emerging headwinds could pose risks.

The logo of Japan's Nomura Holdings is seen near the brokerage and investment bank's head office in Tokyo, Japan, Nov. 28, 2016. (Photo: REUTERS)

In line with growing concerns over expensive equity valuations, Nomura has now downgraded Indian equities from ‘overweight’ to ‘neutral’ as it feels that while the upside is already priced in, there are headwinds emerging that could pose risks in the future. It further said that it is now recommending allocation to China and other Asean countries that have underperformed India in 2021.

What did Nomura say?

Nomura equity strategists Chetan Seth and Amit Phillips prepared a note on Indian equities and downgraded India to neutral in their regional allocation. “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 under-performer seeing stabilising sentiment) and ASEAN (tactically laggard reopening play),” they said in their note.

Stating that the valuations look very stretched, they said that 77 per cent of domestic stocks in the MSCI index are trading higher than pre-pandemic or post 2018 average valuations.

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Among the risks that India faces, Nomura highlighted elevated commodity prices, sticky core inflation and tentative signs of slowdown in demand.

Will this impact FPI flows and lead to correction in markets?

While the concerns around valuations are rising, more such calls by global financial services firms to reduce India equity allocation would result in an outflow of funds going forward and may lead to some correction in the domestic equities. The FPI inflows have already started witnessing moderation. Against a net FPI inflow of Rs 13,154 crore into domestic equities in September, the month of October has witnessed a net outflow of Rs 2,331 crore till date.

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In line with the growing concerns around expensive valuations, the broader indices too have seen some correction over the last week.

While the Sensex hit an all time high of 62,245 on October 19, 2021, it has declined by over 1,400 points or 2.3 per cent since then.

If FPIs pull out more funds from the Indian equities, it could lead to a deeper correction.

What are domestic fund houses and financial advisors saying?

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As the premier indices have rallied strongly this calendar year and have continued with the strength over the last three months, mutual funds and financial advisors are advising investors overweight on equities to go for reallocation and reduce their exposure to equities.

They, however, maintain that those who have little or no allocation to equities, should start or continue with their equity investments.

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First published on: 25-10-2021 at 03:51:48 pm
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