Mumbai: Nomura said it remains selective in Indian equities given the continued increase in COVID-19 cases and slower economic growth.

The brokerage said it prefers exporters, rural consumption and companies that are likely to gain market share through this crisis.

Its top picks include Reliance Industries, Lupin, HCL Technologies, Mahindra & Mahindra and ICICI Bank. Nomura noted that the Nifty has rallied sharply since May 18, outperforming the emerging markets, due to a catch up rally as the Indian markets underperformed over February and March due to relentless selling by foreign investors. Nifty is trading at 19.8 times one year forward earnings after this rally, the highest in the past decade, said Nomura. This, the brokerage said, has lead to the spread between earnings yield and bond yield narrowing and this spread is now within fair value zone.

Meanwhile, the high coronavirus cases spread sugggests restrictions are likely to continue, at least in hotspots.

“The rate of spread of infection, which we define as daily average new cases for the past seven days as a proportion of the number of active cases at the start of the period, is ~10% currently. This is an increase from ~8% since mid-June, probably a result of lockdowns restrictions being eased,” said Nomura. This ratio should be below 7% consustently to prevent an increase in active cases, assuming infection cycle of 14 days, said Nomura.

Nomura also believes that the risk of further cut to earnings estimates remains.

“We have witnessed 9%/5% cuts in Bloomberg consensus. To an extent, nearterm earnings are supported by pent-up demand, low raw-material costs, lower discretionary expenditure and no material increase in credit costs (moratorium impact). With reversal in some of these factors and slower economic growth, there are risks to further cuts in earnings estimates,” said Nomura.

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