Indian markets could see continued pressure as FIIs flock to China, further selling likely: Nomura

The broader market appears to be oversold with percentage of stocks above 200 DMA in NSE500 close to record lows.

Japan-based brokerage Nomura Holdings retained a structural overweight call, but believes that there remains a risk of further multiple compression due to the positive China narrative and domestic local factors.

The brokerage noted that its key concern remains elevated valuations in the domestic markets. Currently, the MSCI India index trades at a PE ratio of 21x, compared to 2015/2022 averages
of 19.6x/21.5x. However, Nomura noted that the 'valuations wouldn't matter until they do.'

The PE ratio of 21x would have become an attractive point to rebuild positions, but given the optimism on China post-DeepSeek and investors having an alternative in China, Nomura sees scope for further multiple compression in the near term.

Investors have been flocking to Chinese equities following China’s technological innovations such as DeepSeek/AI/robotics/EVs suggests that Chinese equities no longer warrant a deep discount.

As a result, Indian equities may see further selling pressure. "The positive narrative on India is also being tested amid a slowing economy and corporate earnings, and earnings estimate downgrades; tight banking sector liquidity; some tariff risks from the US administration; and a weakening and underperforming INR exacerbated by persistent and heavy net-selling from foreign investors creating a vicious spiral," said the brokerage.

Also Read | Citi upgrades India to 'overweight', sees Nifty hitting 26,000 by December

According to Nomura, there could be further FII selling. The brokerage noted that while foreig ownership in percentage terms is now at a decade low of ~16 percent, foreign investors still own $782 billion of Indian stocks, which still appears elevated compared to pre-pandemic levels. "This suggests scope for more net-selling ahead so long as the positive China narrative stays in place."

Nomura further added that while domestic equity flows from retail into domestic mutual funds have so far been very resilient, the brokerage thinks that investors also seem to be concerned that those might be the next shoe to drop, completing what might be the full capitulation and the time for foreign investors to buy.

However, taking a multi-quarter view, Nomura remains positive on the structural story, as we see the ongoing slowdown as a cyclical one rather than a structural multi-quarter slowdown.

On the broader markets front, the NSE500 appears technically oversold with percentage of stocks above 200 DMA in NSE500 and Nifty 50 indices close to record lows. "Historically, that
implies positive performance +3/+6/12 months with high hit-rates – a key caveat is that valuations today are much higher than during previous bottoms," noted the broking house.

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