Tide turns for Indian markets

Nomura turns positive on India as headwinds seem to be subsiding.

What started out as Annus Horribilis (horrible year), 2011 may well turn end up as Annus Mirabilis (year of wonders) for Indian markets. From being the least preferred country in the emerging markets pack, India is back in the reckoning. In its strategy report titled “A Glass Half Full (Erratum),” Nomura Financial Advisory and Securities India says: “We are turning positive on the Indian market as we believe that headwinds facing the economy from inflation are beginning to subside. We are incremental buyers of risk and turn our stance less defensive.” This should come as music to the ears of Dalal Street.

So what’s caused the change of heart? One of the obvious reasons for this change is the absolute and relative underperformance by the Indian market year-to-date. Several foreign brokerages have been murmuring similar things, but have not taken the plunge to officially rerate India. Secondly, measures taken of late both by the central bank and government to cool growth and inflation have been perceived as a big positive. The cooling of global commodity prices has only acted as a kicker. However, a change of stance does not necessarily mean a significant short-term upswing in the market. “It primarily indicates a change in bias, and our belief that a correction in the market should be used as a buying opportunity.”

Even though growth will come in lower than what was projected by the government at the start of the year, the government’s concerted efforts to address some of structural issues affecting the economy is yielding some returns. The street believes that slower growth is not such a bad thing as it will ease supply-side pressures.

So what sectors are analysts at Nomura betting on? Peaking inflation with a consequent relief for the interest rate cycle will likely be a key theme going forward. For starters, the elevated premiums being paid for consumer-facing stocks are at risk in the short to medium term, as some of the slowdown spreads from investment to consumption. If the economy turns for the better on the back of lower inflation, consumer stocks will not rally. The brokerage is turning overweight on banks, real estate and infrastructure & construction. It is turning underweight on consumer, electrical equipment and metals. It continues to remain overweight on IT services, pharma, oil & gas, power and media, while autos, cement and telecom remain underweight. It’s probably time to rebalance portfolios to factor in the changing macro dynamics.