As anticipated, the Reserve Bank of India would possibly comb again a few of the pandemic period measures which lead to a gush of liquidity in the markets, though some concern that the emergence of the Omicron variant would possibly pressure RBI to assume twice. But Nomura says that whereas liquidity tightening itself is basically anticipated, the tempo of tightening would possibly pip the expectations.
“Rising inflation expectations, tight labour market and supply constraints are increasingly making Central banks hawkish. On domestic growth, most segments, particularly consumption and services, are well below the pre-pandemic growth trend,” the report learn.
The influence of RBI’s supportive financial coverage has been negated by weaker shopper sentiment and the continued disruptions from the pandemic. Nomura notes that company earnings are recording a robust revival (CAGR of 23% FY21-24F Vs CAGR of 6% in FY17-20), led by pre-pandemic efforts on value management and disciplined capital allocation, and post-pandemic influence of market share positive factors, increased commodity costs and decrease prices.
“Consequently, profitability is improving, leading to a sharp rise in the earnings-to GDP ratio. The market will increasingly focus on earnings growth beyond FY24F, which will be increasingly dependent on the broader economic growth, in our view,” Nomura mentioned.
Rather than caring over growth charge, because the central banks had been when the pandemic broke out, they’re now extra apprehensive concerning the rising inflation. The US Federal Reserve has turned more and more hawkish, signalling three charge hikes in the approaching yr after sustaining it at file lows owing to the pandemic. “The unprecedented expansion in balance sheet by the central banks had a stronger impact on asset prices than on the real economy. There are upside risks to inflation amid rising inflation expectations, supply disruptions and a tight labor market, which could lead to faster-than-expected tightening of monetary policy,” Nomura mentioned
When it comes to India particularly, Nomura notes that regardless of the robust restoration from the early influence of Covid-19, many financial indicators are nonetheless trending under the pre-pandemic growth path. “India’s potential growth rate is possibly set lower and is impacted by weak consumer sentiment and continued disruptions from the pandemic,” the report mentioned.
The report additionally notes that the pandemic has accelerated the earnings restoration course of due to market share positive factors by massive gamers, decrease working prices and better commodity costs. “The much-awaited rise in corporate earnings to GDP is playing out as earnings growth outpaces economic growth. Over the next 12 months, we expect the market to focus on earnings growth beyond FY24. With an improvement in profitability playing out, growth beyond FY24 will depend increasingly on the broader economic growth,” the report mentioned.
Nomura view on equities:
- Prefer sector/shares with potential enchancment in their growth outlook vs present expectations
- Underweight on home and international cyclicals and chubby on defensive names
- Overweight on IT companies, telecom and healthcare
- In consumption, Nomura prefers staples (low growth expectations) over discretionary
- Nomura prefers auto ancillaries (play on EVs) over OEMs
- Overweight on infra/development, contemplating the coverage deal with investment-led growth and India’s digitisation alternative
- Underweight on metals and Neutral on oil and gasoline
- Top picks: Infosys, Axis Bank, L&T, SBI Life, Bharti Airtel & Lupin
- December 2022 Nifty goal is at 18,150