Even before the conflict, Nomura said India had struggled to make headway within the region as an AI “who-not” market. However, with rising oil and energy prices and continued momentum in the tech cycle, brokerages believe Indian equities may lag behind regional peers. It recommends a shift to Korean equities, particularly after a roughly 15% decline since the conflict began, as well as MSCI China equities, where it is overweight.
The brokerage said the possibility of prolonged disruptions in energy supply could keep oil and energy prices high for longer, posing risks to earnings and valuations. Since the start of the Iran conflict, Nomura has consistently highlighted the vulnerability of Indian equities in a scenario of heightened geopolitical tensions and elevated crude prices.
While recent optimism surrounding a possible end to the conflict has reduced risks of heavy losses, Nomura cautions that continued disruptions to oil flows through the Strait of Hormuz could sustain higher energy prices than previously expected. Analysts see India’s economy as the worst affected by rising energy costs and note that the MSCI India Index has a significant portion of companies that are likely to be adversely affected by higher commodity prices.
Nomura also pointed to signs of a slowdown in domestic equity flows, which have historically acted as a cushion against continued overseas sales. Foreign investors have net sold about $61.2 billion worth of Indian equities in the secondary market since the end of September 2024.
India-focused offshore funds and ETFs have also seen steady outflows. In contrast, domestic retail investors provided support by investing around $60 billion in equity-focused funds through the SIP and lump sum route. However, with market returns remaining subdued, brokerages warned that growing domestic participation could moderate. While SIP inflows have remained resilient, lump sum investments have seen net outflows in four out of the last five months.
These factors could put further pressure on India’s valuation multiple, Nomura said. The MSCI India Index is currently trading at 18.9x forward P/E, representing roughly a 55% premium to Asia ex-Japan valuations with consensus earnings growth estimates of 15-18% for 2026-2027.
As a result, Nomura cut the Nifty’s target for December 2026 to Rs. 24,900, a sharp drop of 15 percent from its initial target of 29,300 last year. Additionally, analysts have warned that the 50-share index could fall further, having already traded 11% since the start of the battle on February 28.
Nomura has joined the likes of Goldman Sachs and UBS in downgrading Indian equities in its latest note.
(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)
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