Nomura ups India rating to overweight
The fear of missing out (FOMO) on the growth opportunity, it seems, is driving foreign investors to Indian shores in droves. A day after Credit Suisse upgraded its stance on India to ‘overweight’ in its Asia Pacific (APAC) model portfolio, Nomura, too, has raised its rating on Indian equities to ‘overweight’ in its Asia ex-japan portfolio.
“A number of recent positive developments in India lead us to change our stance to overweight (from neutral) in our regional Asia-ex-japan (AEJ) allocation. We view India as a counterweight to North Asia as a large liquid market that – despite its strong run recently – does provide a hedge in portfolios. We are modestly reallocating to India from Korea – although we remain overweight on Korea (alongside China and Indonesia),” wrote Chetan Seth and Nirransh Jain of Nomura in a report dated February 17.
Nomura is now much less concerned about two central issues that plagued India –limited fiscal space and vulnerability to Covid-19. The recent developments, it said, have been a surprise. However, Nomura does caution that execution of Budget and other policy proposals remains a key risk.
“India’s recent Budget aims to prioritise fiscal spending/growth over medium-term fiscal commitment — thus, implying a positive medium-term growth outlook, while the Covid-19 situation appears to be largely under control,” Nomura said.
While there are risks to watch out for in the second half of calendar year 2021 (H2CY21) such as Covid/inflation resurgence, policy normalisation, US Federal Reserve-driven taper-tantrum, higher oil/commodity prices and policy execution, the research and brokerage house says, any sustained weakness will likely provide an opportunity to increase India exposure.
Earnings and valuation
However, Nomura did caution against the expensive valuation of the market. From March 2020 low, the S&P BSE Sensex and the Nifty50 have mostly been on a secular uptrend – rising over 90 per cent each. Economic recovery and corporate earnings growth over the past few quarters have also surprised analysts.
The key standout for India, Nomura believes, is the solid consensus on earnings revision trends (for two straight quarters now). Alongside a focus on reforms and measures to attract foreign direct investment (FDI) flows, it feels India will continue to command premium valuations.
“Valuation-wise, India has almost never appeared ‘attractive’ – but today neither are other major regional markets. Whilst absolute valuations at 19.2x two-year-forward PER do not appear very attractive; however, relative to the regional Index (MXASJ), valuations are not as rich. Fiscal/monetary policy support, some focus on reforms and measures to boost FDI flows will likely keep valuations elevated,” Nomura said.