Indian economy set for strongest growth phase since 2010 but limited upside for markets in near term, says Nomura

Global brokerage house Nomura believes that the Indian economy, between 2023 and 2030, may have its strongest growth phase since 2010. India's gross domestic product (GDP) grew at 7.2 percent in FY23.

"In our baseline scenario, India should register a CAGR of around 6.6 percent between FY23 and FY30, a reversal from the falling contribution of capital and productivity in the past decade. This would be the strongest growth phase since FY10, and close to the accelerated growth observed during the FY03-FY10 period, which was supported by a surge in capex," said the brokerage.

It further stated that structural reforms undertaken by the Indian policymakers in recent years and higher allocation towards capital expenditure capex should help India’s GDP growth reach around 6.6 percent per annum over the medium term, and support the Rupee.

However, it cautioned that there may be some headwinds in the near future on the back of the impact of higher interest rates and a slowdown in the developed world.

"While a mix of slowing global growth and lagged effects from monetary policy tightening are likely to impede India's growth prospects in the near term, there has been a marked shift in underlying fundamentals that support a much brighter medium-term outlook," it said.

Meanwhile, the brokerage also stated that a key push factor is the hastening of the pace of global friend-shoring, where India is emerging as a leading beneficiary of shifting supply chains. This puts India in a sweet spot over the next decade, it noted.

The brokerage also pointed out that China has lost its low-cost comparative advantage. With companies looking elsewhere to reduce their reliance on China, it is India and other Southeast Asian countries like Indonesia and the Philippines that have emerged as Asia's new high-flying geese, it said.

"We see a few reasons to remain optimistic that infrastructure spending and execution will accelerate in the medium term, particularly in India, Indonesia and the Philippines," the report highlighted.

Equity markets

Even though the economy is set for its strongest growth phase, the brokerage believes that Indian markets still have limited upside potential in the near term. It, however, sees foundations in place for sustainable growth over the medium to long term, it added.

As per Nomura, the resilient growth outlook should also aid corporate earnings in the medium term. It expects the Indian markets to trade at a premium to global peers, aided by stable macro conditions and higher earnings visibility. Also, strong domestic equity inflows through products like systematic investment plans of mutual funds will also support equity valuations, it added.

"We would view any market correction as an opportunity to buy," said the brokerage, advising a ‘buy on dips’ strategy to investors.

The brokerage also pointed out that before Covid-19, the Indian market traded at an average premium of 45 percent to the EM Index, which had expanded to over 90 percent before scaling back to around 60 percent now. It expects Indian markets to command a larger premium than during pre-Covid times, driven by stable macro conditions, a positive medium-term growth outlook and higher earnings visibility.

Among sectors, Nomura prefers domestic-oriented sectors and companies over exporters, and stocks that provide valuation comfort. It is overweight on industrials and banks while underweight on IT services and consumer discretionary.

Globally, the prospects of subdued growth and the end of policy rate hiking cycles are likely to spur investors to look for new opportunities, highlighted Nomura.

The brokerage also believes that Asia fits the bill as it has stronger economic fundamentals, pro-reform governments that are actively seeking to improve the domestic business climate, and new growth opportunities.

"Since the pandemic, investors have remained underinvested in Asia but, as market repricing shines a positive light on Asia, we expect this to change, and the region to attract more capital inflows, in line with its rising weight in the world economy," it noted.