Nomura Upgrades Indian Stocks Despite Cyclical Slowdown Possibility

Japanese brokerage Nomura has upgraded Indian equities to "overweight" from "neutral", primarily on the stronger structural story presented by Asia's third largest economy. In a report on Tuesday, the brokerage said India is a major beneficiary of the "China+1" theme and possesses a large and liquid equity market. "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 report by its analysts said. Nomura said the stock market is benefitting from the "k-shaped growth", which has led to concerns about equitable growth, where there are fears of the rich getting richer and the poor getting poorer.

"Stock market benefiting from a K-shaped economy; high earnings growth market; earnings revisions and domestic flows still holding up well despite higher rates," Nomura said in a commentary on India. It admitted that the valuations are "expensive" but added that the same will likely remain so in a scenario of policy/government continuity. The recent softness in equities driven by higher oil prices is an opportunity to raise exposure to stocks in the country, the brokerage said.

It also made clear that a cyclical slowdown from a high base is expected but was quick to add that it is unlikely to deter optimism among investors. Among the potential risks faced by Indian equities, Nomura flagged "intense politicking into May 2024 elections" and sustained high oil prices. It also reminded us that government finances are stretched, and there is a risk of "populism/higher taxes/lower government capex, especially going into national elections".

India is also vulnerable to pullbacks given stretched absolute/relative valuations in a scenario of global "risk off", it said, adding that India's underperformance is expected to be transitory. It recommended a theme where an investor can choose from a mix of stocks where the valuations are relatively reasonable. Stocks, which are likely to benefit from some structural themes like increasing adoption of electric vehicles, were also among the recommendations.

(PTI)