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India Key Overweight Among Asian Equities

Nomura believes demonetisation to be a near-term blip for India’s corporate earnings growth, and believes growth story is intact..

ndia is the key overweight in Asian equities as Asia’s third-largest economy has the best earnings growth story in the region, and demonetisation is only a near-term hindrance for earnings growth, Nomura Group said on Friday.

Corporate earnings that were poised for a consumption-fuelled take-off on the back of a good monsoon and sharp wage hikes have been brought back to ground by the sudden withdrawal of high-value currency notes on 8 November, as the effects of a severe cash crunch ripple through the system.

India’s benchmark equity index is down 3.1% since the demonetisation was announced, on concerns a significant pickup in corporate earnings may be delayed. To be sure, the market was also hit, along with its emerging market peers, as Republican Donald Trump unexpectedly won the US presidential elections.

Nomura believes demonetisation to be a near-term blip for India’s corporate earnings growth, and believes the growth story is intact.

“Is demonetisation process going to prove a long-term drag on earnings? Then the answer from our side is no,” Mixo Das, South-East Asia equity strategist at Nomura, said in a conference call with reporters.

“ We would expect earnings to see some near-term correction but then resume back on their strong upward trajectory, where India was and is remains the best earnings growth story in all of Asia,” Das said.

According to Das, near-term downsides in earnings should not have a very significant impact on the markets, as equity markets price earnings for multiple years.

Benchmark Sensex is now trading Rs. 1460.67 fiscal year 2017 earnings per share, down 3% from 1506.49 on 8 November, before demonetisation was announced.

“If a near-term downgrade in earnings does not imply long-term earnings reset, then we should largely look through that,” Das said.

“The point I am trying to make about India being a key overweight is that some profit taking/panic selling on this news has brought valuation to the point where it is attractive,” he added.

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