'Caution despite 2 years of flat returns': 35% of BSE 500 firms face micro issues, says Nuvama

Nuvama Institutional Equities on Tuesday warned that 35 per cent of BSE 500 firms are facing micro risks, adding that 40 per cent expensive cyclicals are prone to macro risks. Global risk-off could hurt Indian equities, the domestic brokerage said.     

FY26 had a litany of historic shocks — Tariffs, technology and now oil. Nuvama said risks of a demand shock loom large as US labour market is weakening, showing recession-like signals. Also, US private credit market ($2 trillion) is facing liquidity issues. This could dampen not just global technology valuations, but also AI capex a la dot-com era, it said. 

"Fed’s QE and oil supply resuming is key to normalcy. Else, brace for volatility," Nuvama said.

This warrants caution despite two years of flat returns, it added as the brokearge downgraded metals to 'underperform' as the 20-year high valuation leaves no room for error. It raised exposure to private banks in its model portfolio. 

With regard to India, global risk-off is likely to weigh on Indian equities as H2FY26 recovery is still narrow. Segments with GST cuts such as automobile and cement have posted a recovery but other segments such as renewable energy, steel and power) remained sluggish.

Earnings estimates are still high and export volatility along with oil shock pose large risks to FY27 earnings growth expectations of 19 per cent for BSE500, Nuvama said.

It said large segments are undergoing industry transitions. They include IT, FMCG, consumer durables, retail, paints and NBFCs. Nevertheless, valuations remain expensive for most despite stocks being flat for five years, Nuvama said. 

Meanwhile, 40 per cent BSE500 stocks are expensive cyclicals prone to macro risks. Automobile, metals, industrials, power, PSU banks, etc. are more than 1SD expensive, it said.

"Moreover, some are at peak margins(a la late cycle), making them quite prone to macroeconomic risks. Hence, overall despite two years of flat returns and policy easing, risk-reward remains unattractive warranting a defensive bias," Nuvama said.