Nomura's Chetan Seth is neutral on India as other emerging markets offer better multiples

There is also the aggressive tightening that needs to be considered. According to Nomura’s India economists, there could be a 150bps rate hike by April 2023. “That is fairly aggressive tightening and, within Asia, that is the fastest amount of tightening you will see,” he said.

He believes there could be more derating because of the high bond yields, at 7-7.5%, which is essentially the discount rate. The derating could also happen because of heavy FII selling. 

“Foreign ownership of India markets has come down but a lot of market participants focus too much on the percentage number. End of April, foreign owners were still holding $610 billion worth of Indian stocks, when their pre-pandemic holding was $430 billion. So, there is still a lot of foreign holding. If there is more deleveraging in global stocks, India will continue to see more foreign selling and I suspect we will get better entry points,” he said.

What about the good news from India–on better corporate balance sheets, asset quality of banks improving and the expectation of the beginning of a new capex cycle?

According to him, those have been priced into the valuations already and therefore they are at 19x. Also, all of these things could be said of other Asia and emerging markets as well, he said.

“It is all about valuations and asymmetry. We are trying to find asymmetry, where there is extreme pessimism, valuations are low, data is bad but there are catalysts around the horizon. That is why we like China. It won’t be easy for the next two to three months, but we find better risk-reward (opportunities) in China. In India, if valuations come off, then we would turn more constructive,” he said.

His team will be keeping a close eye on China’s zero-Covid strategy and how it is playing out. “If that stays, then India might be okay in a relative sense. But, if we get indiciations from China that they are stimulating (the economy) and embarking on some sustainable reopening, then there would be a lot of money flowing out of other emerging markets into China,” he said. If this happens, India could see more selling by foreign investors.

Investors have been selling commodities and buying commodity users. Seth said that they liked that strategy too, and that when they refreshed their positioning for Asia, they employed this. 

“You buy companies that have been hurt by higher commodity prices since their valuations are low. The view is that, in six months, things will stabilise. We have quite a few auto stocks in our Asia model portfolio, including two auto companies from India,” he said.

The risks in this strategy include no rolling over of commodity prices, the global growth remaining strong, China injecting a huge economic stimulus in the next three months, energy prices continuing to stay elevated, no supply response from OPEC or Iran. If these happen, there is a risk for commodity users or consumers, he said.