Goldman Sachs downgrades Indian stock markets' outlook; 5 villains in the picture
While Nifty 50 is trying to survive near 11,400-mark, Sensex on the other hand has given up its all-time high of 38,000-level and is now near 37,500-mark.
Dalal Street saw positive movement in today’s trading session, with both Sensex and Nifty 50 opening higher by 0.06% and 0.10% respectively. However, this breather was short lived, as at around 09:57 hours, Sensex was trading at 37,561.81 down by 23.70 points or 0.06%, while Nifty 50 plunged by 9.40 points or 0.08% trading at 11,368.35. The fact is that Sensex and Nifty 50 have been seeing heavy selling pressure in recent weeks. While Nifty 50 is trying to survive near 11,400-mark, Sensex on the other hand has given up its all-time high 38,000-level and is now near 37,500-mark. There was a time when Indian markets were among the best performing indexes in EM, however, tables have turned now and experts have started to see a change in Sensex and Nifty 50 and it is not good news at all. In a big blow, Goldman Sachs has lowered downgraded Indian equities.
In its research note, Goldman Sachs said, “We have been strategically overweight India since March 2014 as we expected pro-growth government policies and structural reforms to drive a pick-up in economic growth and a recovery in corporate profits. While earnings have improved, Indian equities have almost doubled over the past 5 years and outperformed the region by 60pp in USD terms.”
However, the financial institution also said, “Given elevated valuations and recent strong performance, we believe the risk/reward for Indian equities is less favorable at current levels and we lower our investment view from overweight to marketweight. We expect markets to consolidate heading into the elections and NIFTY to reach our 12000 12m target as political uncertainty wanes and earnings accrue.”
Goldman Sachs explained five key reasons why it downgraded Indian markets.
Indian equities are the most expensive in Asia (19x cap-wgt./ 27x avg. PE) and trading at a record 58% premia to region. At these levels, equities have historically posted negative returns over next 3-6 months.
Goldman economists expect a n/t growth moderation due to higher oil prices (in INR), tighter financial conditions and weak recent activity data. They forecast a wider CAD (2.6% of GDP this year vs. 1.9% in FY18) and our commodities team expects oil prices to stay high ($80/bbl in 3m).
Earnings ‘catch up’ priced in
NIFTY has compounded at 14% over the past 5 years while earnings grew at 5%. While profit recovery is underway, this micro ‘catch up’ doesn’t warrant further market upside, in our view. Indian equities are pricing in a 17% 10-yr earnings CAGR (+0.8 s.d., the highest in region).
DII flows have slowed; yield gap unfavorable for equities
Domestic inflows have slowed for four consecutive months. Funds could potentially see lower equity inflows as the yield gap between equities/bonds has fallen to 10-yr lows.
A likely increase in govt. spending/fiscal deficit before elections and potential event risk of a less stable govt could weigh on markets near-term.
Following above, Goldman mentioned that, sectorally, we upgrade defensives and exporters. We are OW private banks, tech and metals. Ideas: short-dated NIFTY hedge, rural recovery/housing plays, stable GARP, INR beneficiaries vs. losers. Key downside risk: a less stable government. Key upside risk: upside profit surprises, stronger FII flow.
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