Indian equity markets have a limited upside potential in the near-term as they negotiate the ensuing cyclical slowdown, wrote analysts at Nomura in a recent coauthored report led by Saion Mukherjee, their managing director and head of equity research for India.
He, however, believes that the foundations are in place for sustainable growth over the medium-to-long term, and hence suggests a ‘buy on dips’ strategy to equity investors.
As an investment strategy, Nomura prefers domestic-oriented sectors and companies over exporters, and prefers stocks that provide valuation comfort. Industrials and banks are their overweight sectors, while IT services and consumer discretionary are their underweight sectors.
Globally, the prospects of subdued growth and the end of policy rate hiking cycles are likely to spur investors to look for new opportunities, Nomura said, while placing a higher premium on healthy economic fundamentals and sustainable growth.
Asia, Nomura believes fits the bill given that 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,” Nomura said.
That said, the Indian markets have remained range-bound in the last 20 months with the S&P BSE Sensex index oscillating between 57,000 and 63,000 levels.
Thus far in the current fiscal (FY24), the markets have gained ground with the S&P BSE Sensex surging over 6 per cent to around 62,800 level.
The rise in the mid-and small-cap segments has been sharper with the S&P BSE Midcap and the S&P BSE Small-cap indices surging 13.5 per cent and 14.5 per cent, respectively during this period.
The market rally over the past couple of months has mostly been fueled by foreign institutional investors, who invested Rs 61,958 crore ($7.54 billion) in the Indian equities thus far in FY24.
In May alone, they pumped in Rs 43,838 crore ($5.34 billion), data shows.
Valuation premium
Valuation-wise, Nomura expects the Indian markets to trade at a premium to global peers, and strong domestic inflows into equities through the Systematic Investment Plan (SIP) route to support equity valuations.
“Before Covid-19, the Indian market traded at an average premium of 45 per cent to the EM Index.
“This expanded to over 90 per cent before scaling back to around 60 per cent currently.
“We expect India’s equity 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,” Nomura said.
Economic growth
At a macro level, Nomura sees continued investment push post the general elections scheduled for 2024 – both from the government and private players, which the research and brokerage house believes could push up the overall economic growth rate.
As their base-case scenario, Nomura believes India should register a compounded annual growth rate (CAGR) of around 6.6 per cent between FY23 and FY30.
“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.
“Investment and productivity-driven growth over the medium-term should also help contain inflation,” the Nomura report suggests.
Morgan Stanley maintains equal weight on India
Morgan Stanley has maintained an equal weight stance on India.
In its Asia Emerging Market Equity Mid-Year Outlook report, it said, “We see the Multipolar World transition as a tailwind for India and Indonesia, but retain EW recommendations given high valuations, focusing instead on Financials and single-stock beneficiaries.”
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