India's Rating Upgraded From 'Neutral' To 'Overweight'; Nomura Lists Top Stocks

Brokerage firm Nomura has raised India's rating from "neutral" to "overweight" based on a robust top-down narrative and the potential advantages stemming from the China+1 strategy, which encourages businesses to diversify their operations beyond the Asian giant.

"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," Nomura said in a note.

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Despite this, the Japanese brokerage firm maintains a cautious outlook on Asian stocks, citing concerns related to the US Federal Reserve's sustained stance on interest rates and the upward trajectory of commodity prices, which contribute to inflation in the United States.

The brokerage firm has issued a warning that if the Fed does not alter its current course, the prospect of higher US rates and bond yields in 2024 could potentially result in a more significant economic downturn. While equities have seemingly gained from a gradual economic deceleration, this scenario may not endure.

"We turn cautious and selective and raise exposure to the South by upgrading India to an Overweight (OW, from Neutral) and raising Malaysia to a Neutral, while downgrading Taiwan to an Underweight (from Neutral). We stay tactically OW in China and in 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,” the brokerage firm said.

In September, the Indian market displayed volatility attributed to global economic uncertainties, escalating oil prices, and persistent selling by foreign institutional investors (FIIs).

Nomura perceives the market softness resulting from surging oil prices as an opening to enhance exposure. While this vulnerability could persist as long as oil prices remain high, Nomura considers it a transient opportunity, one that may close rapidly

The brokerage firm further added that the valuations are expensive and are expected to stay that way if government policies continue. Despite an anticipated cyclical slowdown from a strong starting point, investor optimism is unlikely to wane, Nomura analysts said.

"It offers liquidity and serves as a counter-weight to North Asia during Western slowdowns and Chinese recovery disappointments. It hosts high-quality/growth stocks, albeit at higher valuations, and is less vulnerable to global trade slowdowns," the report said.

The identification of "intense political dynamics" preceding the May 2024 elections, shifts in China's economic priorities, and the sustained high oil prices pose risks to its investment outlook. As part of its recommendations, it suggests considering investments in ICICI Bank, Axis Bank, L&T, Reliance, ITC, MedPlus Health Services, as well as stocks anticipated to capitalize on structural trends, including the growing adoption of electric vehicles, such as Mahindra & Mahindra and Uno Minda.

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"We see rising FDI in local manufacturing (PLI scheme) and low equity share in household assets. Risks such as China shift, political factors, stretched government finances leading to populism/taxes, election-related uncertainties (May 2024), vulnerability to global market pullbacks, high oil prices (>$100/bbl) impacting CAD/fiscal/earnings (bond inclusion may help), crowded market, and domestic flow reversals," the report added.