Goldman Sachs sees India holding its own even if China stocks rebound

By Ashutosh Joshi

A rebound in Chinese equities is unlikely to spur a strong rotation of funds out of India, where the benchmark index is headed for a record high amid a surge in foreign inflows.

That’s the view from Sunil Koul, Goldman Sachs Group Inc.’s Asia Pacific equity strategist, who says the Indian market’s solid fundamentals will continue to lure long-term investors. Goldman has a target of 20,000 for the NSE Nifty 50 Index by end-March, implying an upside of almost 7% from current levels.

India has been seen as one of the key beneficiaries as global sentiment toward Chinese equities soured due to a slower-than-expected recovery. With the Nifty gauge up almost 8% this quarter, there has been some concern that a sharp rebound in China — where valuations have become too cheap to ignore for some money managers — could hurt Indian stocks. Koul differs.

“You may not see money coming out of India or at least you may not see a sharp selloff” even if China recovers, he said in an interview on Friday, adding that India’s valuations have also corrected from a peak and first-quarter earnings were better-than-expected.

Touting India’s strong historical track record, favorable demographics and a runway for strong economic growth, a team of analysts led by Koul said in a note earlier this month that they expect Indian equities to be a major source of “potential alpha generation” for investors in the years to come.

In the longer run, Goldman sees India recording the largest increase in global market cap share – from a little under 3% in 2022 to 8% in 2050, and 12% in 2075.

Koul’s team said in late November that expensive valuations will likely weigh on Indian stocks in 2023, predicting them to be relative underperformers. Year-to-date, the Nifty has risen 3.8% in dollar terms, trailing the MSCI Asia Pacific Index’s 8% advance. The MSCI China Index is down 2.6%.

To be sure, Koul does anticipate a recovery in China but expects it to be “much more gradual” and driven by underlying earnings versus the fast valuation recovery seen from October to January, he said. “So, I think in that scenario you could still see China doing well but India also equally performing decently overall.”

China stocks are in focus after the central bank surprised Tuesday by cutting a short-term policy interest rate, and given a report that the government is considering a broad package of stimulus measures to boost the world’s second-largest economy.

Thanks to a retail investing boom brought about by the pandemic, India’s market has also lured huge, steady inflows from domestic institutions as well as mom-and-pop traders. That helped avoid a sharp selloff even when foreigners dumped a record $17 billion of local shares in 2022. Global funds have bought $7.6 billion worth of equities so far this quarter, set for their biggest purchases since December 2020.

“India is seeing broader financialization of household savings and this trend is likely to persist,” Koul said. At 5%-6%, the exposure of Indian households to the equity market is still fairly low versus other parts for the world, including Asia, he added.