Economy, markets, investing strategy: Nomura's outlook for India in 2022

After a stellar run in 2021, most brokerages, including Nomura, had downgraded Indian equites in October 2021. Heading into 2022, change in policy stance by the US Federal Reserve (US Fed), inflation risk and the new Covid variants are some of the risks that will impact the global economy and financial markets, including India, Nomura said.

Despite these headwinds, Nomura expects Asian stocks to deliver double-digit returns by end-2022 (base case end-2022F MXASJ target is 925; around 18 per cent higher from the current levels), driven largely by earnings growth and flat multiples from a low base.

“Material declines for Asia stocks are unlikely, as we see several buffers this time (valuations, positioning, fundamentals). Peaking US inflation, and the bottoming out of growth and modest policy easing in China into Q1-2022 should provide relief for Asia stocks eventually,” Nomura said.

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Within the Asian region, the global research and broking house has maintained an overweight stance on China, Korea and Indonesia for 2022. Thailand and Philippines remain their key underweights, and remain 'neutral' on India and Singapore in their model portfolio.

Here’s how Nomura sees 2022 shaping up for the Indian economy and markets.

Stock market: With MSCI India trading at 22.5x forward P/E versus pre-pandemic levels of 18.9x, valuation of Indian equities has emerged as the biggest concern for Nomura after a strong outperformance in 2021. It reiterated its ‘neutral’ stance on Indian equities going into 2022. That said, Nomura sees corporate earnings growth to remain robust in 2022, which should support high valuation multiples of the Indian equites. However, slowing participation of retail investors is one key risk going into 2022, Nomura said. 

Key risks: Covid-19, Nomura said, is a risk as India lags the region on vaccination rollouts. Stretched government finances also raise a risk of populism/higher taxes, especially ahead of some state elections. India, it believes, is vulnerable to higher US yields/Fed policy tightening given elevated valuations that can trigger a correction / volatility in Indian equities.

Investment strategy: Easing supply chain bottlenecks should help the auto sector, Nomura said. That apart, it is bullish on select private sector banks and GARP (growth at reasonable price) stocks such as EV (electric vehicle) supply chain stocks.

For the Asian region as a whole, Nomura believes elevated volatility will favour defensives in the first quarter of 2022, but will also present an opportunity to accumulate quality GARP stocks on dips. “Assuming Omicron is not a major threat, Value / reopening / cyclicals / financials appear better positioned versus high-valuation areas in the first quarter of 2022 on a hawkish US Fed. Balance of risks around growth / inflation / rates / virus still favours a barbelled / balanced portfolio overall, with stock selection key for alpha,” Nomura said.

Inflation woes: Inflation has emerged as the key risk for the global economy, according to Nomura. Inflation, it said, has clearly been more persistent and more broad-based than what the Fed and most market participants, including them, had anticipated it to be. This has led to increasing market expectations that monetary policy is set to become tighter, although the Covid-19 Omicron variant is an uncertainty and may lead market to pull back some of these expectations if growth starts faltering. India, it said, is particularly at risk in the backdrop of rising inflation expectations driven by higher commodity prices.

 

“Given the varied vaccination rates across the globe, the emergence of the Omicron variant of the Covid virus, there is significant uncertainty on the economic outlook. We think near-term inflationary pressures alongside recent hawkish turn will likely lead to elevated volatility in financial markets,” Nomura said.

Interest rates: Even though Nomura agrees with the Reserve Bank of India's (RBI’s) assessment on growth (uneven recovery), they disagree on inflation and see upside risks materialising in 2022 due to the build-up of cost pressures. It now expects the RBI to hike the reverse repo rate by 40 basis points (bps) in February, but sees the repo rate hike pushed to April.

"In the latter part of the year, we expect the RBI to hasten policy rate hikes in an effort to catch up with the curve; we now expect 100bp of repo and reverse repo rate hikes in 2022, up from our previous forecast of 75bp," Nomura said.