JP Morgan downgrades Indian equities to neutral on valuation concerns

JP Morgan has downgraded Indian equities to “neutral” from “overweight,” citing elevated valuations and rising macroeconomic risks linked to energy supply disruptions.

The move comes just a day after HSBC also lowered its rating on the market, highlighting growing caution among global brokerages.

As cited in a Reuters report, the brokerage said Indian equities continue to trade at a premium compared to other emerging markets, even as external risks mount.

It flagged that the ongoing Iran-related tensions could disrupt energy supplies, putting pressure on earnings and economic growth.

Oil prices, inflation risks weigh on outlook

JP Morgan warned that surging crude oil prices could fuel inflation and dampen growth prospects.

Higher energy costs may squeeze consumption and reduce corporate margins in the near term.

The brokerage also pointed to a weakening rupee as an additional source of pressure.

Currency depreciation could further increase import costs, amplifying inflationary concerns and impacting profitability across sectors.

Earnings estimates and growth forecasts trimmed

Earlier this month, JP Morgan revised its earnings outlook for several domestic sectors.

The brokerage cut FY2027 earnings estimates by 2% to 10% across energy, consumer, auto, and financial sectors.

It also lowered MSCI India earnings growth forecasts for 2026 and 2027.

Growth projections were reduced by 2 percentage points and 1 percentage point, respectively, bringing them to 11% and 13%.

These revisions reflect the brokerage’s cautious stance on near-term earnings amid rising macroeconomic headwinds.

Nifty target lowered as markets decline

JP Morgan also reduced its year-end target for the benchmark Nifty 50 index by 10% to 27,000.

Indian benchmark indices have already seen declines this year, with the Nifty and Sensex falling 8.5% and 10%, respectively.

Both indices are currently trading significantly below their recent record highs.

The Nifty is about 9.3% below its early 2026 peak, while the Sensex is roughly 11% lower than its late 2025 high.

The brokerage emphasised that this valuation gap makes India less attractive relative to other emerging markets offering comparable or better growth prospects.

Limited exposure to high-growth themes

JP Morgan also noted that India lacks meaningful exposure to key high-growth sectors such as artificial intelligence, data centres, robotics, and semiconductors.

This could limit earnings expansion compared to peers with stronger representation in these industries.

Market dilution and capital flows add pressure

The Wall Street firm flagged market dilution as another concern.

Strong domestic institutional inflows have helped offset foreign outflows.

However, increased stake sales by major shareholders and record fundraising through IPOs and QIPs are capping market gains.

Long-term outlook intact, near-term cautious

Despite the downgrade, JP Morgan maintained that India’s long-term growth story remains intact.

However, it warned that the near-term outlook has weakened due to valuation pressures and macro risks.

The brokerage continues to favour sectors such as financials, materials, consumer discretionary, hospitals, defence, and power.

It remains underweight on IT and pharmaceuticals.

Overall, the downgrade underscores a shift in sentiment as global uncertainties and domestic valuation concerns weigh on India’s equity market outlook.