Global Brokerages Warn of Caution on India Amid Macroeconomic Challenges and Elevated Valuations

Global Brokerages Warn of Structural Risks in Indian Equities

Global brokerages are growing increasingly cautious on Indian equities, with back-to-back downgrades last week and a warning on structural risks in an open letter to Prime Minister Narendra Modi underscoring concerns that could weigh on India's long-term growth trajectory.

On April 23, HSBC downgraded Indian equities to underweight, marking its second downgrade this month, citing elevated valuations, inflation risks from rising energy prices, and pressure on demand and corporate profitability. A day later, JPMorgan cut its rating from overweight to neutral, flagging similar concerns around valuations, earnings risks, and India's limited exposure to high-growth sectors such as artificial intelligence. The brokerage also lowered its Nifty 50 base-case target for 2026 to 27,000 and outlined a bear-case scenario of 20,500.

In a parallel development, Bernstein cautioned in an open letter to the Prime Minister that India risks under-delivering on its economic potential if key structural issues remain unaddressed, highlighting concerns around slow manufacturing growth, high subsidy burdens, weak agriculture, and the potential impact of AI-driven disruption.

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The latest downgrades follow a broader shift in sentiment in March, when global firms including UBS, Nomura, Citi, and Goldman Sachs turned cautious on Indian equities. Elevated crude oil prices remain a key concern, as they could hurt corporate earnings, push up inflation, and widen the current account deficit. Brokerages have also pointed to weakening global risk appetite, softer foreign flows, and tighter financial conditions as factors that could weigh on valuations.

India's relatively high valuation premium compared to other emerging markets has further limited the scope for a sharp re-rating. In addition, risks such as a weak monsoon and potential fertilizer shortages could impact agricultural output and food inflation, adding to macro uncertainty.

Against this backdrop, Indian markets may see limited near-term upside as investors remain cautious. Foreign portfolio investors have been intermittent sellers, with outflows exceeding $18.8 billion in recent months, reflecting the cautious global stance. Domestic institutional investors, however, have continued to provide support, helping cushion downside risks.

Domestic brokerages, while acknowledging near-term risks, remain constructive on the medium to long term. They believe much of the impact from geopolitics and oil prices has already been priced in following the recent correction, with valuations, particularly in large-cap stocks, moderating closer to historical averages.

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Sunny Agrawal, Head of Fundamental Retail Research at SBI Securities, said he remains bullish, highlighting strong opportunities in the midcap and smallcap space, with earnings growth visibility of around 18 to 20 percent and more comfortable valuations after the correction. He added that while benchmark indices such as Nifty may consolidate and deliver returns of around 10 to 12 percent in line with nominal GDP growth, broader markets are likely to outperform as many high-growth companies lie outside the top index universe.

Experts said investors willing to look beyond largecaps could potentially generate returns of 15 to 17 percent over the next two to three years by identifying opportunities in sectors such as auto ancillaries, power-related businesses, and manufacturing.

Few experts said that much of the war-related impact on growth is already reflected in market prices and that India's long-term trajectory remains supported by strong domestic demand, continued government capital expenditure, and an improving export outlook, adding that corporate profit growth is expected to return to early double digits. Experts also expect FY27 Nifty earnings per share in the range of Rs 1,280-1,320 and see the index potentially reaching 28,000 to 31,000 by March 2027, implying 15 percent to 25 percent upside.

On the valuation front, currently the Sensex and Nifty are trading at around 18.5 times one-year forward earnings, below their long-term averages of 19.8 times and 19 times, respectively. However, broader markets continue to trade at a premium, with the BSE MidCap 150 at 26.84 times and the BSE SmallCap 250 at 24.14 times compared to their historical averages.

Kranthi Bathini of WealthMills Securities said global brokerages have turned cautious due to geopolitical uncertainties and rising crude oil prices, which are weighing on growth expectations. However, he noted that such views tend to be cyclical. "Historically, global brokerages change their stance when conditions improve. If earnings recover, geopolitical tensions ease, and crude oil prices stabilize in the range of $70 to $80 per barrel, they are likely to turn constructive again," he said, adding that markets are increasingly becoming stock-specific and India remains relatively fairly valued compared to other emerging markets.