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Informist, Tuesday, Mar. 11, 2025

MUMBAI – The recent fall in benchmark indices suggests India-centric risks such as slower earnings growth are priced in by the market to a reasonable extent but there are new risks emerging at the global front which may lead to a further fall in valuation, Nuvama Institutional Equities said in its latest strategy report. 

The brokerage said the biggest risk for markets in 2025 stems from the possiblity of a recession in the US. This is a big risk for India as the margin-led tailwinds have faded and earnings would mirror the overall demand globally, Nuvama said.

It said consumer sentiment in the US may take a hit due to Trump's tariffs policy and retaliatory tariffs by other countries, which may lead to higher inflation. "This is happening at a time when global trade has been weak for two years. Global uncertainty could potentially further weaken the same," Nuvama said.

"On that (demand in India) front, the outlook is muted as exports uncertainty persists, credit growth is weak, household incomes are subdued, and fiscal is consolidating. Moreover, weakening equity markets are likely to trigger a negative feedback loop as well, given the dominance of wealth effect. Thus, it is quite clear that earnings support to equities is certainly behind," Nuvama said.

Slowdown in the US and in worst case, a recession, would weaken emerging market currencies and futher hit flows into Indian markets, Nuvama cautioned. Foreign institutional investors have already been on a selling spree in India with March turning out to be third straight month when they net sold Indian equities. 

Weak outlook on global economy and flows is a problem for Indian equities as valuation have not yet become cheap. The brokerage said valuation of Nifty 50 have fallen close to its 10-year average but that of mid-caps is still one standard deviation abour the long-term average. However, it highlighted that other valuation metrics--market capitalisation to GDP ratio of top 500 companies on the BSE, and earnings yields minus bond yields--show that equity markets are still expensive.

Considering this, Nuvama said markets are still some time away from a "durable" bottom. The Nifty 50 has witnessed a sharp decline recently, falling nearly 15% since hitting a lifetime high in September last year.

"...irrespective of the metric, valuations at best have reverted to their 10Y average and are not particularly cheap yet," Nuvama said. "Fundamentally for equities to do well, either earnings growth should be strong with low cost of capital or absent both, valuations should be dirt cheap."

Nuvama made slight changes to its portfolio and downgraded information technology companies to 'underweight' from 'neutral' as valuation compared with the Nifty 50 are still higher at a time when global growth outlook is weak. "We have argued in the past that during a global crisis the IT sector has performed in line with or outpaced Nifty. However, what is different this time is the very high starting point of relative valuations and outperformance in the run-up to the crisis. Hence, we think IT could see a sharp fall going ahead," the brokerage said.

It also raised weightage of consumer companies in its portfolio which already has 'overweight' rating on the sector. It said crude oil prices are likely to come down which would support margins. Further, the valuations are relatively more reasonable, which could provide for a "good hiding place" in the near-term. It acknowledged that there are medium-term challenges for the sector due to high profitability and as direct-to-consumer brands have hurt the distribution network of listed companies. End

Reported by Anshul Choudhary

Edited by Deepshikha Bhardwaj

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