Brokerage firm Nomura upgraded India’s rating from “neutral” to “overweight” crediting the country’s strong top-down narrative in a note to investors on Wednesday. The firm noted that the China+1 trend of encouraging businesses to invest beyond the country benefitted the Indian economy. “We think the structural story of India is now well known as a major beneficiary of the “China+1” theme possessing a large-liquid equity market,” the Japanese brokerage firm said.
However, Nomura remained wary about Asian stocks owing to the risks from the US Federal Reserve’s prolonged rate stance and increasing commodity prices adding to inflation in the US, reported Moneycontrol.
The brokerage firm in it’s report cautioned that increased US rates and bond yields could cause a deeper economic shutdown in 2024 if the US Fed stays on it’s current path. “We turn cautious and selective and raise exposure to the South by upgrading India to an Overweight (OW, from Neutral) and raising Malaysia to a Neutral, while downgrading Taiwan to an Underweight (from Neutral). We stay tactically OW on China and on Korea. Style-wise, we favor a mix of value, strong balance sheets and companies that can deliver super earnings growth but avoid high-valuation/unprofitable areas of the market,” the firm added.
Notably, the Indian markets have been volatile in September on weak global cues, increasing oil prices, and consistent FII selling. Nomura commented on the market conditions and stated that the weakness might persist as long as crude prices stay on the higher end, however it remains an opportunity that might be unavailable very quickly. Analysts with the firm noted that valuations are on the higher end and expected to stay there if the government policies continue, while investor optimism is unlikely to diminish.
The report said, “It offers liquidity and serves as a counter-weight to North Asia during Western slowdowns and Chinese recovery disappointments. It hosts high-quality/growth stocks, albeit at higher valuations, and is less vulnerable to global trade slowdowns.”
Identifying the potential risks to the investors’ confidence, the report noted, “We see rising FDI in local manufacturing (PLI scheme) and low equity share in household assets. Risks such as China shift, political factors, stretched government finances leading to populism/taxes, election-related uncertainties (May 2024), vulnerability to global market pullbacks, high oil prices (>$100/bbl) impacting CAD/fiscal/earnings (bond inclusion may help), crowded market, and domestic flow reversals.”
The brokerage firm recommended a portfolio including stocks with favourable relative valuations and exposure to domestic growth sectors like banks and infrastructure. The recommendations included ICICI Bank, Axis Bank, L&T, Reliance, ITC, MedPlus Health Services, along with stocks projected to gain from structural trends like the increase in adoption of electric vehicles like Mahindra & Mahindra, and Uno Minda.
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