Virendra Verma

Mumbai, Jan. 18

SOME foreign broking firms have downgraded Indian equities, at least for the time being. After being bullish on India till a few weeks ago, these broking firms have turned bearish as stock prices have run-up very fast and looks overvalued.

Some of them have downgraded India to `underweight' from `overweight' this month. This means that the returns from Indian equities, according to them, are likely to be lower compared to other emerging markets.

FIIs normally make investment decisions based on the recommendation of foreign broking firms operating in India.

The Dutch Bank ABN Amro said: "We are reluctant to chase the Indian market at current levels because it now appears expensive, even when we factor in impressive economic and earnings numbers. India also looks vulnerable to an unwinding of the dollar carry trade in first quarter of 2005".

On these concerns, the bank has put India in `underweight' category. Other Asian countries, which have also been put to `underweight' category include China, Korea and Taiwan.

Deutsche Bank has also downgraded India to `neutral' from `overweight'. Neutral rating means that returns to be in line with other Asian markets.

The downgrade is purely based on valuation concerns. "We are also worried by the strength of flows running into the Indian market which are beginning to look climactic".

Investment banking firm Morgan Stanley said: "The market's P/E (price-earning) did not change a bit in 2004 with earnings being the key driver of stock returns. Fundamental factors including the possibility of a lower payout ratio and the starting point on P/E do not favour a rise in P/E in 2005, and with earnings looking vulnerable, the outlook for index returns is shaky".

Till the beginning of December, most foreign broking firms were bullish on India, leading to expectations of increased FII inflow. But since the beginning of this year stock prices have fallen after touching all-time high levels. For instance, theBSE Sensex is down 7.5 per cent from its all-time high level of 6696 touched on January 4. The S&P CNX Nifty index is down 8.77 per cent from its all-time high of 2120.15 touched on the same day.

FIIs inflows too have not matched the flows seen in December. Till yesterday, FIIs were net buyers to the tune of Rs 322 crore in the equity market.

(This article was published in the Business Line print edition dated January 19, 2005)
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