Nomura upgrades India to ‘overweight’ from ‘neutral’; Reliance, ICICI Bank, ITC, among top picks
Nomura upgrades India to 'Overweight' citing strong top-down narrative and potential to benefit from 'China+1' theme.
International brokerage house Nomura has upgraded India from 'Neutral' to 'Overweight' in light of a strong top-down narrative and its potential to benefit from the 'China+1' theme.
Although cyclical downturn is to be expected in the months ahead, Nomura indicated in its analysis that macros are quite robust relative to other markets. However, the brokerage believes this is unlikely to significantly change the structural attraction.
The brokerage claims that the stock market benefits from a K-shaped economy, high earnings growth, earnings revisions, and domestic flows that are still holding up well despite higher rates. It also believes that the market is highly liquid and acts as a counterweight to North Asia in the event of a slowdown in the West and China's continued recovery failures.
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The brokerage added in its analysis that risks associated with the investment case include China's re-rotation, intense political campaigning leading up to the May 2024 elections, and persistently high oil prices.
“While this weakness may persist in the near term so long as oil prices remain high – thus presenting even better timing – we think the window of opportunity might not be open for 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,” said Nomura in its report.
Nomura advised a portfolio that included investments in companies with favourable relative valuations and exposure to domestic growth industries like banks and infrastructure.
Included in its list of suggested stocks are ICICI Bank, Axis Bank, L&T, Reliance, ITC, MedPlus Health Services, as well as companies that are anticipated to gain from structural trends like the rising popularity of electric vehicles, such Mahindra & Mahindra and Uno Minda.
The brokerage did note, however, that given the resilience of the US economy and the Fed's higher-for-longer stance, it sees risks for stocks in Q4 from rising commodity prices (and consequently stickier or accelerating US inflation) and from this stance.
According to Nomura, the notion that stocks have benefited from an easy landing may shift.
In 2024, the likelihood of a deeper downturn increases due to higher US interest rates and bond yields unless the Fed quickly changes direction.
"Based on this over-arching world view, we turn cautious and selective and raise exposure to the South by upgrading India to an Overweight (OW, 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. If the US economy does slow in 4Q23, it is likely that the market may treat this as “good news is bad news” temporarily, but we caution that this upside-down market may not be sustainable," said the brokerage in its report.
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