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Foreign brokerage firm Nomura has upgraded the Indian stock market to "overweight" and said that the structural story of India is now well known as a major beneficiary of the "China+1" theme, possessing a large, liquid equity market.

“We see recent softness driven by higher oil prices as an opportunity to raise exposure. While this weakness may persist in the near term, thus presenting even better timing, we think the window of opportunity might not be open for too long. Valuations are expensive but will likely remain so in a scenario of policy/government continuity," Nomura said in a report.

A cyclical slowdown from a high base is expected, but will unlikely deter investor optimism, in our view. Intense politicking into May 2024 elections, China rerotation and sustained high oil prices are potential risks, the report said.

Nomura further said it is turning cautious and selective on Asia ex-Japan stocks. “Into Q4, we see risks for stocks from elevated commodity prices (and thus stickier or accelerating US inflation) and from the Fed’s higher-for-longer stance given the resilience of the US economy."

Stocks appear to have benefited from a soft-landing, but this narrative could change, in our view. Higher US rates and bond yields raise the risk of a deeper slowdown in 2024 unless the Fed reverses course soon. Based on this over-arching world view, we turn cautious and selective and raise exposure to the South by upgrading India to an Overweight (OW, from Neutral), Nomura said.

“We stay tactically OW on China and on Korea. Style-wise, we favor a mix of value, strong balance sheets and companies that can deliver super earnings growth but avoid high-valuation/unprofitable areas of the market," it added.