Indian Stocks Structurally Positive Despite Near-Term Risks, Says Nomura

Near-term risk continues to haunt the Indian stock market, given the slowing macro and earnings momentum, according to analysts at Nomura Research. Despite this, the brokerage house maintained a "structurally positive" view with 'overweight' allocation.

India's macro environment is undergoing a cyclical slowdown, but this does not meaningfully alter the structural attraction, Nomura said in a note on Dec. 3. Still, India has strong top-down narrative as a likely beneficiary from the 'China+1' theme, it said.

The country's gross domestic product grew at the slowest pace in nearly two years, led by slower growth across the industrial sector. Economists have trimmed forecasts despite expectations of a recovery in the second half of the fiscal.

India's stock market tends to benefit from a K-shaped economy and the domestic equity flows are still holding up well despite a pullback in stock, the note said. The economy is less exposed to global trade slowdown and any risk from trade protectionism or Trump tariffs, Nomura said.

Large liquid market and a counter-weight to North Asia in a tariff scenario serves India well, while China continues to disappoint on recovery, it said. India is home to high quality growth stocks, albeit at an expensive valuation, it said.

The brokerage prefers a bottom-up selection strategy for the domestic market with a focus mostly on stocks with valuation support and domestic-focused, US growth and defensive areas. Nomura prefers Reliance Industries Ltd., Infosys Ltd., ICICI Bank Ltd., Hindustan Unilever Ltd., Lupin Ltd., Larsen & Toubro Ltd. and Bharti Airtel Ltd. in this strategy.

It also favours stocks that are likely to benefit from some structural themes. Mahindra & Mahindra Ltd. and Shriram Finance Ltd. are preferred stocks on this front.

Nomura foresees a cautious start for Asian equities in 2025, given the elevated geopolitical and trade tensions amid looming tariffs, and monetary policies that are less supportive.

"However, investors need not be overly pessimistic, as Asia has some resilience this time," the global brokerage said. This provides a case to be be prepared to raise risk exposure sometime during the year, it said.

US policies under the new administration, China’s policy outlook, the sustainability of AI theme, US inflation and growth outlook and the Fed’s stance are the main investment themes in 2025, Nomura said.

On a top-down basis, the research firm favoured domestic demand-oriented economies and stocks, as they are "likely to prove more insulated from trade and policy uncertainty, and will focus on Asia’s idiosyncratic themes."

Nomura upgraded Taiwan to 'overweight', and maintained its overweight stance on India and Malaysia. China's stance was maintained at 'neutral', while Korea and Indonesia were downgraded to that rating. It remained 'underweight' on the Philippines, Thailand, and MSCI Hong Kong.