Goldman Sachs cautious on 'expensive' Indian stocks ahead of elections

By Abhishek Vishnoi

Global headwinds and expensive stock valuations necessitate a cautious approach toward Indian equities in the short term as the country prepares for next year’s national elections, according to Goldman Sachs Group Inc.
 

“The sharp rally since end-March, expensive valuations and global macro risks (high oil, high US rates, strong dollar) warrant a tactically conservative stance over the next three to six months,” analysts including Sunil Koul and Amorita Goel wrote in a note.

While this year’s surge in equity markets makes for a great backdrop for Prime Minister Narendra Modi — who is seeking a third term in office — a sense of caution is building. Goldman’s view comes as overseas investors sold $2.3 billion worth of Indian stocks on a net basis in September, following six months of inflows. 

The polls are likely to have a bearing on economic policy and reforms at a time the world’s fastest-growing major economy is increasingly seen as an alternative to China.

Goldman retained its market-weight stance on India in early July, from where the Nifty 50 Index has remained little changed. It rose as much as 0.6 per cent on Thursday.

Having climbed more than 15 per cent from a March low, India’s NSE Nifty 50 Index is trading at 18.2 times its one-year forward earnings, making it the most expensive national benchmark among major Asian markets, according to data compiled by Bloomberg. The Nifty Midcap 100 Index has risen 37 per cent in the period.

While the gauge has rallied more than 10 per cent in the six months preceding election results in four out of the past seven instances since 1996, its valuations and midcap stocks’ performance look stretched relative to prior election cycles, the Goldman analysts said.

Yet, they said Indian equities’ implied volatility is low and not pricing in any significant event risk from elections as an opinion poll suggests Modi will retain power.

Investors can rotate to large stocks, and those tied to higher return ratios and consumption recovery, the analysts wrote. They can hedge risks by buying put options on the Nifty index, some of which are currently the most inexpensive among major indexes globally, they added.

‘Incrementally watchful’ on midcaps after rally, says Citi 

Citi narrows its list of preferred midcap stocks, signaling a cautious tone following a sharp rally fuelled by $10 bil­lion of foreign inflows since June. Funda­mentals are “unchanged,” with high premium on valuations com­pared to larger stocks. Mid­caps have gained 11 per cent in the last three months, while largecaps slipped 1 per cent in the same period. Dispro­port­ionate inflows into small and midcaps have likely contri­buted to the strong outperformance.