International brokerage firm Nomura has upgraded India’s investment rating from ‘Neutral’ to ‘Overweight,’ citing a compelling top-down narrative and the country’s potential to capitalize on the ‘China+1’ theme. In its analysis, Nomura acknowledges the likelihood of a cyclical downturn in the coming months but emphasizes that India’s macroeconomic fundamentals remain robust compared to other markets. The brokerage believes that these strengths are unlikely to significantly alter India’s structural attractiveness for investors.
Nomura’s assessment highlights several key factors contributing to India’s positive investment outlook:
K-Shaped Economy: India’s stock market benefits from a K-shaped economy, characterized by high earnings growth, positive earnings revisions, and resilient domestic investment flows, even in the face of higher interest rates.
Liquidity and Diversification: India’s market is highly liquid and serves as a counterbalance to North Asian markets. This diversification is particularly valuable in the event of a slowdown in Western markets and China’s potential economic challenges.
Resilience in a Challenging Environment: Despite potential risks, such as China’s economic shifts, intense political campaigning ahead of the May 2024 elections, and persistently high oil prices, Nomura believes that India’s resilience in the face of these challenges presents an attractive opportunity.
Timing and Valuations: While near-term weaknesses may persist as long as oil prices remain high, Nomura suggests that the window of opportunity for investors in India may not remain open for an extended period. Valuations are considered expensive but are expected to stay elevated in a scenario of policy and government continuity.
Nomura’s investment strategy recommendations include building a portfolio with investments in companies offering favorable relative valuations and exposure to domestic growth industries such as banking and infrastructure.
Notable Stock Recommendations:
Nomura’s suggested stock picks include:
- ICICI Bank
- Axis Bank
- Larsen & Toubro (L&T)
- Reliance Industries
- ITC
- MedPlus Health Services
Companies poised to benefit from structural trends, such as the growing popularity of electric vehicles, like Mahindra & Mahindra and Uno Minda.
Risks and Cautions:
While Nomura is optimistic about India’s investment prospects, it acknowledges potential risks related to rising commodity prices and stickier or accelerating US inflation, particularly due to the resilience of the US economy and the Federal Reserve’s stance on higher interest rates. Nomura also points out that the perception that stocks have enjoyed an easy landing may change, especially in 2024, as higher US interest rates and bond yields become a reality unless the Federal Reserve alters its course.
Nomura’s upgrade of India to an ‘Overweight’ rating is based on its positive outlook for India’s macroeconomic fundamentals and its potential to thrive in the ‘China+1’ landscape. However, it advises caution and selectivity in investment choices, emphasizing a mix of value, strong balance sheets, and companies capable of delivering substantial earnings growth while avoiding high-valuation and unprofitable segments of the market.
