JPMorgan is advising investors not to add Indian equities at current levels as valuations suggest that the market is set up for a potential downside in the medium term.

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"While markets can defy valuation excess now, this does not bode well for medium-term returns," JPMorgan's head of India research and India equity strategist Sanjay Mookim wrote in his note.

Indian markets have had a stellar run from their recent lows in June, with the Nifty 50 index gaining nearly 3,000 points and the S&P BSE Sensex surging over 10,000 points during the period since then.

The move was led by Foreign portfolio investors (FPIs), who emerged as net buyers of Indian equities in August 2022, which marked the first month of inflows for the market in nearly a year.

The rally over the last three months has taken the valuations of the MSCI India index back to the highs during the pandemic. It currently trades at 21.6 times forward price-to-earnings, compared to 18.4 times in December 2019.

India's Nifty 50 index has outperformed the S&P 500 by a distance this year. The 50-stock index is up 1.5 percent year-to-date, while the US benchmark is down nearly 20 percent.

JPMorgan cites that the Nifty's price-to-earnings premium to the US benchmark is now nearing a 10-year high. Another reason cited by the broking firm for a potential downside is that nearly one-fifth of the index's market capitalization is now trading at over 50 times forward price-to-earnings.

The brokerage has listed some potential risks to Indian equities in the near term:

Further global macro weakness can cause India to play catch-up in the near-term

Forex reserves are now at 9.4 months of imports from the peak of 19 months

Spike in energy costs during the winter could hurt the currency, which has appreciated against the Euro, Japanese Yen and the Chinese Yuan

What do investors do?

JPMorgan believes that Indian financials are the only major non-commodity sector within the growth names that are available at a reasonable price. It also advises investors that it is best to remain defensive, citing consumer staples, which, although not cheap, have limited earnings risks as input prices decline.

First Published:Sept 16, 2022 9:39 AM IST