Global brokerage firm Nomura raised its exposure to South Asia by upgrading India to 'overweight' from ‘neutral’.
“The structural story of India is now well known as a major beneficiary of the “China+1” theme, possessing a large, liquid equity market. We see the recent softness driven by higher oil prices as an opportunity to raise exposure. While this weakness may persist in the near term, we think the window of opportunity might not be open for too long. Valuations are expensive but will likely remain so in a scenario of policy/government continuity,” said the brokerage.
The Indian markets have been volatile in September due to weak global cues, rising oil prices and relentless FII selling. After hitting new peaks in the first half of the month, the latter half has seen a strong decline.
The brokerage views this recent softness, which is a result of higher oil prices, as an opportunity to increase exposure.
“While this weakness may persist in the near term, thus presenting even better timing, we think the window of opportunity might not be open for too long,” it said.
It further mentioned that there could be some cyclical slowdown in the next few months but investor optimism is unlikely to wane. This is because, as per the brokerage, structural attractiveness remains intact.
"The stock market thrives in a K-shaped economy with high earnings growth, resilient earnings revisions, and strong domestic flows. 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.
Going ahead, it believes intense political activity into the May 2024 elections, China's re-rotation, and sustained high oil prices are potential risks for the Indian economy. Also, populist measures and lower government capital expenditure (capex), especially going into the elections, could be a concern, it added.
It further cautioned that the expensive valuation in the Indian markets is likely to remain so in a scenario of continuity in policies and government and there could be a pullback in the Indian markets in case of a global ‘risk off’ scenario as valuations are rich both on an absolute and relative basis.
"If global oil prices remain above $100 per barrel, it will be a major risk. It may put pressure on the current account and fiscal deficits and also hurt corporate earnings. The reversal in domestic flows also remains a key risk for the Indian markets," added Nomura.
The brokerage suggests a portfolio comprising stocks with favourable relative valuations and exposure to domestic growth sectors like banks and infrastructure.
Its recommendations include ICICI Bank, Axis Bank, L&T, Reliance, ITC, and MedPlus Health Services. Nomura is also positive on stocks that are likely to benefit from some structural themes such as increased adoption of electric vehicles. These include Mahindra & Mahindra and Uno Minda.
Nomura on Asia
Even though the brokerage has raised its exposure to South Asia, it has turned cautious and selective on Asian equities on the back of risks from elevated commodity prices and the US Federal Reserve's higher-for-longer stance. However, it is optimistic about Asia’s economic and earnings growth, while concerns about US inflation and the growth outlook may dampen sentiment toward stocks.
"Stocks appear to have benefited from a soft landing, but this narrative could change. Elevated commodity prices, stickier-than-expected US inflation, and the Federal Reserve's higher-for-longer stance, given the resilience of the US economy, are risks for stocks in Q4FY23. Based on this overarching world view, we turn cautious and selective and raise exposure to the South by upgrading India to ‘overweight’ from a ‘neutral’ stance," Nomura said.
Meanwhile, the brokerage has downgraded Taiwan to 'underweight' while being tactically ‘overweight’ on China and Korea. It also upgraded Malaysia to a ‘neutral’ stance.
For China, the brokerage continues to see value. "There are some early signs of improvement in economic data and policy remains supportive, with clear signs that Beijing wants to reinvigorate the economy, financial markets and confidence. Positioning is very light, but we sense a ‘buyers strike’ and recognize investor concerns around medium-term issues that will cap valuations (in particular US-China relations and the property sector),” Nomura said.
Style-wise, the brokerage favours a mix of value, strong balance sheets, and companies that can deliver super earnings growth, but avoid high-valuation and unprofitable areas of the market.
It fears that higher US rates and bond yields could lead to a deeper economic slowdown in 2024 if the Fed doesn't change its course. While stocks have appeared to benefit from a gentle economic slowdown, the situation may not persist.
“It will be hard for Asian stocks to do well if the U.S. economy slows in 2024. Nonetheless, we think there is some support for Asian stocks from a strong earnings outlook and modest valuations,” warned Nomura.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.