Goldman Sachs has downgraded its stance on the Indian markets to ‘marketweight’ from ‘overweight’, citing “delayed recovery and extended valuations”.
The US-based investment bank has also lowered the Nifty target to 9,600 for June 2021, expecting substantial downward revisions to corporate earnings.
“Valuations look optimistic even accounting for a recovery. With uncertainty about near-term earnings, P/E multiples using perfect EPS foresight and on CY21, EPS remain well above previous crisis levels,” Goldman Sachs said in a note.
India’s trailing price-to-book (P/B) ratio at 2.2 times is 15 per cent above the trough of the 2008-09 global financial crisis (GFC), it says.
The brokerage says “foreign ownership remains elevated” as the selling by foreign portfolio investors (FPIs) only accounts for 0.4 per cent of India’s market capitalisation, compared to 2.3 per cent during the GFC.
The brokerage is positive on infotech and defensive sectors of staples, telcos and health care as they have “higher earnings resilience”. The brokerage has lowered its stance to underweight on financials and domestic cyclicals. Goldman Sachs says key investment themes are “oversold quality and growth stocks, and stocks with stronger balance sheets, and high free cash flow yields.”
It says unless India unleashes a big stimulus package, domestic equities could underperform.
“For India, with rising new confirmed cases, an extension of the nationwide shutdown for three weeks (until May 3) and limited fiscal easing so far (compared to other major economies), we think the economy could recover more gradually than some of its North Asian peers. While markets may not retest fresh lows given reduced global risks, we believe Indian equities are likely to relatively lag the region on expectations of a slower recovery. However, more forceful policy stimulus could pose a risk to that view,” Goldman Sachs says.
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