Nomura Turns `Neutral' on India Stocks After Rally on Valuations, Outlook
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Indian stocks may be headed for a period of “consolidation” after a recent rally, Nomura Holdings Inc. said.
Investors should move to a “tactical neutral” on India even though the 12-month outlook for the country’s equities remains positive, Nomura analysts led by Prabhat Awasthi wrote in a report today. They lowered their recommendation for Indian automobile stocks to “underweight” from “overweight,” according to the report.
The Nomura analysts said on May 27 they were becoming “more bullish” on Indian stocks as the nation’s economic outlook improves and after valuations fell. The Bombay Stock Exchange’s Sensitive Index has climbed 13 percent from a recent low set on May 25.
“The recent system-wide squeeze in liquidity and emerging signs of an easing in economic activity lead us to think that we might be heading into a period of market consolidation,” the analysts said. “Profits have come largely in line with our analyst expectations, and we do not expect them to be a meaningful catalyst to drive the market higher.”
The gains in share prices, along with “weak” upgrades in analysts’ earnings forecasts, mean valuations are now “less attractive,” according to the Nomura analysts. The Sensex, as the benchmark index is known, is valued at 17 times estimated earnings, having climbed from this year’s low of 15.8 times at the end of May, according to data compiled by Bloomberg.
Still, the analysts said they remain positive on Indian stocks over the next 12 months, given the “sanguine” outlook for the nation’s economic growth and a likely peak in inflation.
Economy, Inflation
India’s $1.2 trillion economy may expand 9.4 percent in the fiscal year to March, the fastest pace since 2007, the International Monetary Fund said on July 8. The nation’s central bank, which has a growth forecast of 8.5 percent, has increased interest rates four times in five months amid signs that capacity constraints are building up in industries.
Nomura remains “bullish” on banks and real estate stocks, with State Bank of India and Unitech Ltd., a developer, ranking among its top picks, according to the report.
The analysts removed Gail India Ltd., the nation’s monopoly natural gas distributor, from its top picks and replaced Bajaj Auto Ltd., India’s second-largest motorcycle maker, with Mahindra & Mahindra Ltd.
To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net
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