US Federal Reserve’s rate hike cycle – widely expected to begin September 2015 – is likely to have limited impact on Asian equities, with India being the most favoured destination as it will be the best turnaround story, Nomura observed in a media conference call on Wednesday.
Based on historic trends, Nomura observed that the early phase of a Fed rate hike cycle “seldom” spells the end of Asia-Pacific equity upside. Nomura clarified that countries with weaker external balances and higher reliance on external funding would be more prone to rising risk premia induced by “dearer offshore capital costs”.
“Data in fact show positive correlation between rising US rates and higher Asia-Pacific ex-Japan equity P/E multiples, as well as stronger cross-border inflows into regional stocks. Style-wise, rising interest rate periods also support growth more than value or dividend yield,” said Rob Subbaraman, MD, chief economist and head of global markets research – Asia ex-Japan, Nomura.
The Japanese financial services firm reiterated its ‘overweight’ stance on India and has pegged the markets as a “wild card” in the list of Asian and Emerging Markets (EMs). It said India is more resilient now than it was during the 2013 taper tantrum as the country has made structural progress in the last two years.
Nomura observed that cyclical recovery of India’s economy is underway and lower inflation paired with easier financial conditions, faster project approvals and public investment in infrastructure should support a gradual growth revival in 2015-16.
The brokerage also said RBI is likely to leave the rates in India unchanged until end of 2017 as the economic recovery is still underway and inflation expectations are still high.
On the fiscal front, indirect tax collections have been higher suggesting that the government is on track to meet its FY16 budget expectations of 3.9% of gross domestic product (GDP) and the focus shifts to the government’s ability to push through key reforms such as land, labour, tax reforms in the monsoon session of the parliament.
Nomura highlighted specific issues such as weak monsoons, surge in food inflation, weaker than expected external demand and slower-than-expected investment revival as key risks to India’s economic growth and equity markets.
They expect tech, industrial, consumer durables and the financial sector except property to be top performers. It also notes that Australia and Hong Kong would be the key under-weights.