Nomura has hiked its exposure to Indian equities in its Asia ex-Japan portfolio and remains overweight on Indian stocks, despite expensive valuations.
In a recent note, the global brokerage firm said India now commands a weight of 19 per cent in the above-mentioned portfolio as compared to 18.2 per cent in September 2023.
India, it said, is a large liquid market and remains a counter-weight to North Asia if a slowdown in the West occurs and China’s recovery disappoints.
India, Nomura believes, is home to several high-quality growth stocks albeit expensive, and is less exposed to global trade slowdown.
“Going into 2024, balancing between economic/earnings/political/easing/ sectoral cycles, structural growth prospects, geopolitical risks, and equity market liquidity, we prefer India.
"Structurally, we would be buyers on dips assuming political/policy continuity, and Korea and China (both tactically into Q1 at least).
"In ASEAN, our preference is Thailand (we remain neutral), while we downgrade Indonesia to underweight,” Nomura’s Chetan Seth, Anshuman Agarwal and Ankit Yadav wrote in the note.
Among Indian stocks, Reliance Industries is Nomura's biggest exposure where the research and broking house has a 4.5 per cent weight. ICICI Bank (3.5 per cent), Godrej (2.5 per cent), Axis Bank (2.5 per cent), Mahindra & Mahindra (2.5 per cent), Larsen & Toubro (1.5 per cent), UNO Minda (1.5 per cent), and Fortis (0.5 per cent) are the other Indian stocks that it holds.
China rotation, risk of politicking, stretched government finances raise the risk of populism/higher taxes/lower government capex, especially going into national elections (May 2024) are some of the risks that Nomura has flagged that can impact the Indian stock market's performance in 2024, said the note.
“Indian equities are vulnerable to pullbacks given stretched absolute/relative valuations in a scenario of global risk off, although we expect India's underperformance to be transitory.
"Elevated oil prices (over $100 a barrel) are a major risk as they may pressure current account deficit (CAD)/fiscal/earnings, although recent bond inclusion should help flows.
"India remains a crowded market and reversal of domestic flows could hurt,” Nomura cautions.
Modest return
That said, Nomura expects Asian ex-Japan equities to see a modest return in 2024 (MXASJ 2024F target: 673, up 9 per cent), supported by strong earnings growth rates, stabilisation in valuations/softer USD (on peak Fed rates), and a better fund flow environment.
It has, however, cautioned against volatility in the year ahead.
“Our base case is slower global growth, moderating inflation (and thus peak Fed rates), a mild US recession in 2H (and thus Fed rate cuts in 2024), but more growth supportive measures from China (but not enough for a meaningful recovery in China’s growth/property sector), and a continued chip/tech sector recovery in 1H24.
"If this view is indeed correct, we expect a pullback in Asian stocks during the middle of 2024, but recovery in 4Q through a mild recession, but overall positive returns in 2024,” Nomura said.
A mild recession in the US, it said, might turn out to be a major “clearing event” for stocks, leading to a better flow environment for them.
Any sell-off in Asian stocks due to global macro factors, Seth, Agarwal and Yadav said, will be an opportunity to raise exposure to those stocks, especially in structural growth areas.
“Key sources of uncertainties stem from US inflation/growth/policy outlook; China’s growth issues/policy outlook; and political cycles in Asia and the sustainability of AI/semi/chip cycle recovery beyond H1-CY24.
Sector, stock selection and being nimble will likely be the key to outperformance,” Nomura said.
