Nomura prefers India over Korea; ups rating to overweight in Asia portfolio

The fear of missing out (FOMO) on the growth opportunity, it seems, is driving foreign investors to Indian shores. 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 an 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 February 17 co-authored report.

Nomura is now much less concerned about two of the central issues that plagued India – India’s limited fiscal space and vulnerability from Covid-19. The recent developments, it said, have surprised them. However, Nomura does caution that execution of Budget and other policy proposals remains one of the key risks.

“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 in the second half of 2021 (H2’2021) 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

That said, Nomura does caution against the expensive valuation the market is trading at. From March 2020 lows, the S&P BSE Sensex and the Nifty50 have mostly been on a secular uptrend – rising over 90 per cent each since then. Economic recovery and improvement in corporate earnings over the past few quarters have also surprised analysts.

The key standout for India, Nomura believes, is the solid consensus’ earnings revision trends (for two straight quarters now). Alongside a focus on reforms and measures to attract foreign direct investment (FDI) flows, they think 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.

On their part, foreign institutional investors (FIIs) have been bullish on Indian equities and have pumped in over $3 billion thus far in 2021. They had invested around $23 billion in calendar year 2020 (CY20). And experts suggest the positive stance and the flow will continue in the foreseeable future.

“In the near term, we expect India equities to remain well supported and investor interest will remain high. The consensus earnings expectation could see further revision before higher commodity prices start to affect margins. Continue to like companies from sectors that are going to benefit from the Covid-19 recovery,” wrote Jitendra Gohil, head India equity research at Credit Suisse Wealth Management in a recent co-authored note with Premal Kamdar.