Global brokerage firm Nomura has upgraded its investment view on the Indian equity market to ‘overweight’ from ‘neutral’ on the back of strong macroeconomic fundamentals and the expected benefits from the ‘China plus one’ policy. “The structural story of India is now well known as a major beneficiary of the ‘China+1’ theme, possessing a large, liquid equity market. We see recent softness driven by higher oil prices as an opportunity to raise exposure,” analysts at Nomura stated.
Analysts also maintained that there could be some cyclical slowdown in the next few months, but that won’t alter the “structural attractiveness” of India as a long-term investment destination. “While this weakness may persist in the near term, thus presenting even better timing, we think the window of opportunity might not be open for too long. Valuations are expensive but will likely remain so in a scenario of policy/government continuity. A cyclical slowdown from a high base is expected, but will unlikely deter investor optimism, in our view. Intense politicking into May 2024 elections, China re-rotation and sustained high oil prices are potential risks,” Nomura analysts Chetan Seth, Anshuman Agarwal and Ankit Yadav said.
Earlier in August, Morgan Stanley had upgraded its stance on India to ‘overweight’ on the back of multipolar world trends that support FDI and portfolio flows, boosted by India’s reform and macro-stability agenda that underpins a strong capex and profit outlook. The report by Morgan Stanley had said that India is now the most-favoured equity market, with relative valuations less extreme than in October last year.
Nomura said that it is positive on stocks that are quoting at ‘reasonable relative valuations and domestic growth areas’ (banks and infrastructure stocks). It favoured stocks like ICICI Bank, Axis Bank, L&T, Reliance, ITC and MedPlus. The brokerage firm also said that it is positive on stocks that are likely to benefit from some structural themes such as increased adoption of electric vehicles. It picked Mahindra & Mahindra and Uno Minda.
In terms of risks, Nomura said sustained high oil prices, China re-rotation and the general elections in 2024 are the key risks for the Indian markets. Further, populist measures and lower government capital expenditure (capex), especially going into the elections, could be a concern. There could also be a pullback in the Indian markets in case of a global ‘risk off’ scenario as valuations are rich both on an absolute and relative basis, it added. Further, if the global oil prices remain above $100 per barrel, it may put pressure on the current account and fiscal deficits and also hurt corporate earnings. Reversal in domestic flows also is a key risk for the Indian markets, the report stated.
China outlook
Nomura, however, continues to keep its outlook as ‘overweight’ on China. “We continue to see value; there are some early signs of improvement in economic data and policy remains supportive, with clear signs that Beijing wants to reinvigorate the economy, financial markets and confidence. Positioning is very light, but we sense a ‘buyers strike’ and recognize investor concerns around medium-term issues that will cap valuations (in particular US-China relations and the property sector),” Nomura analysts said.
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