Asian markets have the potential to outperform in the global portfolio, said the latest report by Nomura, which maintained an overweight rating on India in its Asia ex-Japan portfolio. Reliance Industries (RIL), Infosys, ICICI Bank, Mahindra & Mahindra (M&M) and Dr. Reddy’s are Nomura’s preferred picks in the Indian context.
The global research and brokerage had cut the Nifty50 target to 15,340 for March 2022 (earlier target: 14,680 by December 2021), which it has retained for now. Going ahead, markets, Nomura said, will focus more on corporate earnings rather than the broad economic growth in India. If the broader economic growth sustains above a threshold, corporate India, Nomura feels, can deliver on earnings through improvement in profitability.
“Top down, we think equities still appear attractive relative to bonds – until yields go higher to a level where bonds start becoming attractive (possibly +2 per cent). Investors appear too cautious on Asia equities, but we think Asia has potential to outperform in global portfolios,” wrote analysts at Nomura led by Jim McCafferty, their joint-head of APAC equity research.
Their end-2021/22 target for MSCI Asia–ex Japan (MXASJ) is 900/974 on expectations of continued earnings recovery in 2021/22F. This translated into a return of 27 per cent to 38 per cent from the current levels where the index currently is. That said, though they caution against the risk of a short-term pull-back if inflation overshoots and the policy normalization narrative gains strength, on an overall basis Nomura remains constructive on Asian equities from a medium-term perspective.
“Stock selection will be key, and the recommended strategy is unchanged: barbell/balanced portfolios with a mix of Thematics and attractively valued reopening plays/financials/cyclicals as inflation hedges,” Nomura said.
Inflation and commodities prices; taper talks and rates outlook; earnings disappointments, especially from the technology sector in Asia; regulation, higher taxes and rising social tensions in the Asian region; and Covid infections are the three key risks to their stance on Asian equities.
Country-wise, their preference still remains towards North Asia over South/South East Asia. The former, it believes, is more resilient to higher rates/inflation/tapering and COVID outbreaks — and has stronger fiscal buffers and more exciting long-term themes to offer. CLICK HERE FOR THE CHART
As an investment strategy, Nomura believes there is still some more room for ‘value stocks’ to outperform ‘growth stocks’. From a valuation standpoint (and in light of expectations of higher US bond yields, assuming inflationary pressures persist), absolute valuations of Growth stocks, Nomura said, are still not at levels where they would be inclined to shift the balance in favour of growth stocks.
“We would look to be more constructive on ‘growth stocks’ in the next few weeks/months, if we see signs that bond yields are likely peaking and/or inflationary pressures are peaking or likely to subside. Higher valuations (high PEG) stocks remain susceptible to higher yields / inflation. Value/Commodity stocks’ strong run suggests that the best of the gains are likely behind us, and thus these stocks are susceptible to peaking ‘reflation’, ‘rotation’ and ‘rollouts’. Investors thus should look to accumulate QGARP stocks on any weakness and ‘Defensive Balance sheets’ amid volatility,” Nomura said.
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