Nomura's Shift to Overweight Rating for India with Top Stock Picks

27 Sep, 2023

Nomura's Shift to Overweight Rating for India with Top Stock Picks

Brokerage firm Nomura recently made a significant market shift by upgrading its rating for India from "neutral" to "overweight." This strategic decision is based on a compelling top-down narrative and the potential benefits stemming from the "China+1" trend, which encourages businesses to diversify their operations beyond the Asian giant.

In a note to investors dated September 27, Nomura articulated its rationale, stating, "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."

However, while expressing optimism about India's prospects, the Japanese brokerage house has adopted a cautious stance regarding Asian stocks. It points to risks stemming from the US Federal Reserve's prolonged commitment to low interest rates and the upward trajectory of commodity prices, which are contributing to inflationary pressures in the United States.

Nomura has issued a warning that higher US rates and bond yields could potentially lead to a more pronounced economic slowdown in 2024 if the Federal Reserve does not alter its course. Although the stock market has seemingly thrived amidst a gradual economic slowdown, this situation may not persist indefinitely.

In response to these considerations, Nomura has adopted a more cautious and selective approach, upgrading India to an "Overweight" rating (from Neutral) and raising Malaysia to a "Neutral" rating, while downgrading Taiwan to an "Underweight" rating (from Neutral). Nomura continues to maintain a tactical "Overweight" position on China and Korea.

From a stylistic perspective, Nomura favors a blend of value-oriented stocks, those with strong balance sheets, and companies poised for exceptional earnings growth. The brokerage advises against high-valuation or unprofitable areas of the market.

The Indian market has exhibited volatility throughout September, influenced by global weak cues, rising oil prices, and persistent Foreign Institutional Investor (FII) selling. Nomura views the softness attributed to rising oil prices as an opportunity to increase exposure. Although this weakness may persist as long as oil prices remain elevated, Nomura views it as a fleeting window of opportunity.

The brokerage also acknowledges that valuations are currently elevated and may continue to be so if government policies remain unchanged. Despite an anticipated cyclical slowdown, investor optimism is unlikely to wane, according to Nomura analysts.

The structural attractiveness of India's stock market remains intact. It thrives in a K-shaped economy characterized by high earnings growth, resilient earnings revisions, and robust domestic capital flows. India offers liquidity and acts as a counterweight to North Asia during Western economic slowdowns and Chinese recovery setbacks. Furthermore, India hosts high-quality and growth-oriented stocks, albeit at higher valuations, and is less susceptible to global trade slowdowns.

However, Nomura identifies several risks to its investment thesis, including "intense politics" in the run-up to the May 2024 elections, shifts in China's economic focus, and sustained high oil prices. The brokerage also points out factors such as a potential China shift, political considerations, stretched government finances leading to populism and taxes, election-related uncertainties (May 2024), vulnerability to global market pullbacks, high oil prices (>$100/bbl) affecting CAD, fiscal policies, and earnings (with bond inclusion potentially offering help), a crowded market, and the possibility of domestic capital flow reversals.

In light of these considerations, Nomura has suggested a portfolio that includes stocks with favorable relative valuations and exposure to domestic growth sectors like banks and infrastructure. Some of their recommended stocks include ICICI Bank, Axis Bank, L&T, Reliance, ITC, MedPlus Health Services, and stocks expected to benefit from structural trends such as the increasing adoption of electric vehicles, such as Mahindra & Mahindra and Uno Minda.