Indian stock market bulls may take a breather for the next three to six months as exorbitant valuations limit returns on Dalal Street, according to Morgan Stanley. Global brokerage Morgan Stanley downgraded Indian stocks to the same weight in its latest strategy note for emerging markets in Asia, following similar downgrades by Nomura and UBS recently. “We are making profits out of India OW, but we remain structurally positive…” said Morgan Stanley.
Lately, local markets have come under pressure after hitting all-time highs with inflation fears and exorbitant valuations taking center stage. Last week, UBS downgraded India and described the market as “too expensive”. Along with UBS, Nomura downgraded India from “overweight” to “neutral” citing expensive stock valuations.
Expensive evaluations to reduce returns
“While the underlying fundamental indicators are positive, we see valuations increasingly constraining returns over the next three to six months, particularly as we head towards Fed cuts, absorb the impact of higher energy costs and forecast a first-cycle RBI rise in February. 2022, Morgan Stanley said. After achieving sharply upgraded consensus earnings already through 2021, India’s 12-month forward P/E ratio has moved to an all-time high of 24.1 times, making Dalal Street the most expensive market in Their model in emerging markets 5. -year trailing Z- points P/B and P/E.
So far this year, companies Sensex and Nifty have zoomed in by 25% and 27%, respectively. However, since mid-October, both major indices have fallen by more than 3% each. Meanwhile, the volatility scale has been magnified by 9%.
Structurally positive in India
Despite India’s credit rating downgrade, analysts at Morgan Stanley added that the country is otherwise on track to rebounding its earnings for several years and that the current headwinds may only be short-lived. They highlighted that MSCI India achieved 26% in the past six months and outperformed the MSCI Emerging Markets Index by 30% over the same period. This strong outperformance is partly due to the bullish earnings outlook and positive reform agenda.
Earlier this year, Morgan Stanley’s Indian equity strategy team, led by Redham Desai, said signs emerging from capital expenditures, supportive government policy to increase corporate earnings share in GDP and a strong global growth outlook would help India enter a new profit cycle, Which may result in profits of more than 20% per annum over the next 3-4 years. Currently, the brokerage prefers consumer discretion and financial data while avoiding India’s technology and healthcare sector.
What UBS said, Nomura
Earlier last week, UBS analysts said India, aligned with Taiwan and Australia, were their least favorable markets. They added that India has expensive valuations with waning earnings momentum while the scope for economic recovery is dwindling this year. Meanwhile, the Nomura analyst said they are now seeing unfavorable assessments of risk and reward, as a number of positives appear to be priced in, while headwinds emerge.