Nomura downgrades Indian equities from 'overweight' to 'neutral'

Says there are few signs of meaningful economic recovery

Nomura has downgraded its stance on domestic equities from “overweight” to “neutral”, citing slower-than-expected economic recovery and fears of fiscal slippages. The change in stance comes even as the benchmark indices continue to scale new lifetime highs. 

In the past month, the Sensex has closed at new all-time highs on five occasions, and also on Monday. 

“With the domestic benchmark index rallying but still little signs of a meaningful recovery in growth, we believe the scope for outperformance of India equities is limited. Thus, we downgrade our tactical relative stance on Indian equities to neutral. We would look to turn more constructive on India once the domestic economy recovers much more strongly than currently expected,” the brokerage said in a note. 

Nomura had upgraded the Indian markets to “overweight” less than five months ago, hoping that the government will take a series of measures to arrest the decline in economic growth. In the meantime, the markets have rallied sharply, even as a sustained economic recovery remained elusive.

“As we stand currently, we find our overweight on India did not work as expected, given that the north Asian markets have rallied much harder, because of a better external environment on the easing US-China trade tensions (which was not part of our baseline view back then),” it said. 

On an overall basis, Nomura believes the economic conditions are suited for equity markets. The brokerage is predicting the market performance will be better in the first half of 2020 and “somewhat weaker” in the second half.

The brokerage is overweight on export-oriented economies, such as Japan, China, and South Korea.

“We believe with the external backdrop expected to improve marginally and tech cycle expected to recover, a domestic-oriented market like India may have a hard time outperforming the more cyclical north Asia markets geared to the tech/growth cycle as well as global growth,” says Nomura. The brokerage says the Union Budget on February 1 will be a key event from the market perspective. “... The general consensus view is that some more ‘soothing measures’ are likely. It is unclear how far these measures will go to boost the Indian economy and may only boost sentiment on the margin this time,” it says.

The brokerage says the fiscal situation continues to remain tight.

“We believe the fiscal policy is quite constrained, too. There is also a risk on fiscal should oil prices remain high.”

Nomura says as the valuations of the benchmark indices are “not inexpensive” investors, the gains could be capped and investors might have to look for opportunities outside the blue-chip index. “Non-index and non-mainstream stocks hold much more promise.”