Nine reasons why top three global funds have downgraded India’s equity markets

Experts believe that with a sharp one way rally so far, the markets are due to correct

Nine reasons why top three global funds have downgraded India's equity markets
Markets start November series on a positive note.

Are you an investor are looking to invest in Indian markets? Then you must know that three of the top global brokerage fund houses including Nomura, UBS and Morgan Stanley have downgraded India and Indian markets. Here’s what this development could mean for your portfolio

1. Overweight to Neutral

Nomura has downgraded Indian equities from ‘overweight’ to ‘neutral’ . It has recommending reallocating funds to China and other ASEAN countries, which have underperformed India so far in 2021. Similarly, UBS earlier this month had said that Indian stock valuations look unattractive. The foreign brokerage assigned an ‘underweight’ to India while double upgrading the rating for China equities to ‘overweight’. Morgan Stanley too has downgraded India and Brazil markets to equal-weight

2. High Valuations

One of the key reasons for this downgrade is high valuations. Unfavourable risk-reward given high valuations appears to be a concern. Fund houses believe that a number of positives appear to be priced in now while the headwinds are emerging.

3. Overwhelming majority trading higher than average valuations

As per Nomura, At stocks level, almost 77% of Indian stocks in the MSCI index are trading higher than pre- pandemic or post 2018 average valuations. The MSCI Emerging Markets Index is used to measure the financial performance of companies in fast-growing economies around the world.

4. Outperforming global peers

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

5. Policy Normalization

Some of the other risks which could limit the markets move on the upside are policy normalization. The government and the central bank have been providing liquidity support to the economy for dealing with the pandemic blow. This money has found its way into the stock markets, aiding the rally. With increasing signs of withdrawal of support across the globe, similar actions are expected in India.

6. Core inflation

India is also dealing with a 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.

7. Retail participation

Another near-term risk to watch out is a likely reversal in retail investor participation. Retail investors rushed to stock markets during the last 1.5 years as reflected by the new 14 million de-mat accounts that were open. This was due to various reasons of job cuts, pay cuts, lesser money spending options etc. Once we move to normalisation, people are back-to-work and there is a hike in interest rate, there is a fear of withdrawal from markets.

8. Economic rebound less likely

There is less scope for an economic rebound this year. Expensive currency also suggests some vulnerability for India in the tapering environment.

9. Correction

Experts believe that with a sharp one way rally so far, the markets are due to correct. While we are already down 5% from high as for the benchmark indices, one should be prepared for another 5-10% fall. However, for individual portfolios, analysts suggest to book excessive profits and stay put for the long term in quality fundamental stocks as the long term bull trend of the market remains intact.

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