Nomura flags risk of near-term underperformance for Indian equities but sees correction as re-entry opportunity

Nomura sees the benchmark Nifty 50 closing the year around 24,860, slightly lower than its current levels.

Brokerage firm Nomura has flagged a potential for near-term underperformance for Indian equities amid the ongoing shift in allocations towards China and discomfort over lofty valuations. Despite that, the brokerage is of the view that this correction will not last much longer as it will provide another buying opportunity for investors given that India's structural growth story remains intact.

"We think the structural story of India remains quite attractive, and should valuations revert to more palatable levels, foreign (and even domestic) investors would likely look to re-enter the market," Nomura wrote in a note.

Nomura highlighted that India’s forward P/E ratio of around 24 times, compared to its post-2015 average of 19.5 times, could ease to 21 times if the market sees more short-term weakness, which would likely attract investors back into Indian equities.

On the other hand, while talks of investors leaving India to buy China have been making the rounds, many market experts do not see this trend sustaining in the long term. Nomura too sees it as a regional rotation or profit-taking in Indian equities.

"Investors may reduce their exposure to India, ASEAN, and even Korea as they rebalance their China holdings," Nomura stated while highlighting that even though FPI ownership in Indian equities slipped to 18.9 percent at the end of September, as against pre-pandemic level of 20.1 percent in absolute dollar terms, their holding still remain relatively large.

Also, although China has pledged fiscal support to revive its economy, the details remain unclear and hopes of more stimulus were crushed after China's state planner--the National Development and Reform Commission's press briefing yesterday. Nomura believed that if China fell short on delivering meaningful announcements and execution, investors may likely shift their focus back to Indian equities.

A glimpse of that scenario was also seen in the previous session as Indian benchmarks snapped a six-day fall while Hong Kong's Hang Seng tanked 10.5 percent after China's state planner disappointed investors who were hoping for more stimulus to fast track the country's economic revival.

Follow our market blog to catch all the live action

Meanwhile, even though investors have been concerned about India’s valuations for some time, Nomura think it will now increasingly become a factor should there be any slowdown in foreign and even domestic flows amid the ongoing underperformance. Based on that, the brokerage sees the benchmark Nifty 50 closing the year around 24,860, slightly lower than its current levels.

Another brokerage, Bernstein also remarked on India's lofty valuations, stating that return on equity (RoE) for Indian equities are nearing its peak. It believes that one RoE for Indian equities hit a peak, discomfort over valuations will start trickling immediately.

Currently, Bernstein also sees very narrow segments in the top 100 universe of Indian equities where sizeable upscale potential is still on offer. This according to the brokerage, may hinder further gains in the broader indices.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.