Book profits now, CLSA warns Dalal Street investors as valuations, RBI rate hike take center stage

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November 15, 2021 11:59 AM

After a stellar 20-month rally, analysts at global brokerage and research firm CLSA believe, Indian equities are now on ‘borrowed time’ while advising investors to book profits.

NiftySimilar to peers, CLSA has flagged concern over expensive valuations. (Image: REUTERS)

After a stellar 20-month rally, analysts at global brokerage and research firm CLSA believe, Indian equities are now on ‘borrowed time’ while advising investors to book profits. Sensex and Nifty have skyrocketed 120% and 124% respectively, since the beginning of April 2020, setting multiple all-time highs along with way. However, expensive valuations, elevated input price, and probability of earnings disappointment are now seen as reasons that limit any further upside. CLSA joins the likes of Nomura, UBS, and Morgan Stanley in cutting India’s weightage citing expensive valuations.

Time to head out

“We call time on the 20-month rally in Indian equities, lowering our exposure to India within an AC APAC ex Japan portfolio to 40% underweight,” CLSA said in the report. So far this year India has been the best performing stock market in Asia. Among the key reasons behind the downgrade by CLSA has been rising energy prices, margin pressure, and withdrawal of RBI’s stimulus. The brokerage firm said that typically high energy prices, such as the current trend, spell the end of rally in Indian equities. The brokerage firm also expects RBI to announce first rate hike in April 2022.

CLSA has also highlighted the dearth of fresh buying from foreign investors. “… since the start of April this year the pace of net foreign equity purchases slowed considerably and has latterly started to modestly reverse for a cumulative $1.2 billion of net selling over the past seven months,” the report said. Although domestic demand is present, the same has started to wane recently.

Valuations too expensive

Similar to peers, CLSA has flagged concern over expensive valuations. “Trading on a 31.6x cyclically adjusted P/E, India is currently at the most expensive earnings-based valuation since June 2008 at more than one standard deviation above its 18-year average of 22.6x,” they said. Earlier, last month UBS said Indian markets were “extremely expensive” while Nomura downgraded India from ‘overweight’ to ‘neutral’ citing expensive equity valuations. Morgan Stanely has remained structurally positive but cut Indian to equal weight.

“India’s return on equity is precisely in-line with that of overall emerging markets, yet investors are now paying more than twice the book multiple (3.9x versus 1.9x) for Indian assets versus MSCI EM,” CLSA said. 

What others said

Analysts at Morgan Stanley in October had predicted that Indian stock markets may take a breather for the next three to six months as expensive valuations limit returns. Morgan Stanley believes India’s fundamentals are still positive but on the back of the expected RBI rate hike and Fed tapering, coupled with global inflation, returns seem limited.

Meanwhile, Nomura had said that they see an unfavorable risk-reward ratio on the back of valuations, as a number of positives appear to be priced in.

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