Goldman, Nomura bullish on Indian equities in 2016

However, they expect inflation to nudge higher in 2016, and the RBI to stand pat on rates through 2016 in this backdrop

At a time when foreign investors are closely monitoring the progress of reforms, foreign brokerages remain hopeful of a cyclical recovery and an acceleration in growth during calendar year 2016 (CY16).

In their recent report, global research and brokerage houses – Goldman Sachs and Nomura – expect the gross domestic product (GDP) to touch 7.9 per cent and 7.8 per cent, respectively, in 2016. They also caution against a rise in inflation, which in turn, could see the Reserve Bank of India (RBI) keep rates unchanged all through 2016.

 

Despite inflationary pressures, Goldman Sachs expects a healthy growth rate in corporate earnings and the best market returns for India in the Asian region. Nomura, too, remains optimistic on the road ahead for Indian equities.



“In light of a pick-up in Indian economy in 2016, our house view is that earnings can grow 14 per cent for 2016-17. In terms of market returns, we estimate India to deliver 13 per cent in dollar terms, the highest in Asia,” said Tushar Poddar, chief India economist, Goldman Sachs.

On the other hand, Nomura’s main overweights, according to a recent report titled ‘Asia 2016 outlook – Choppier seas ahead’, remain Korea and India; and technology, industrials, discretionary and banks and insurance sectors. Key underweights include Australia, Hong Kong, Malaysia and Thailand; and the telco, staples, property, and upstream energy and materials spaces. Maruti Suzuki, Axis Bank, Container Corporation of India and HCL Technologies are its Asia-Pacific ex-Japan top picks for 2016.

While economic reforms are likely to continue, Nomura, in the report, said executive decisions were likely to take more of the spotlight. The main focus, it believes, would be on the government’s ability to implement the goods and services tax (GST), state elections in mid-2016 and redemptions of FCNR (B) dollar deposits in Q4 2016.

Nomura expects India’s GDP growth to rise from 7.3 per cent in 2015 to 7.8 per cent in 2016 and eight per cent in 2017, led by strengthening domestic demand. It also expects the consumer price inflation (CPI) inflation to remain well above the RBI's five per cent target in March 2017 and the four per cent target in March 2018, and suggests that the RBI could keep rates unchanged in 2016.

On the other hand, Goldman Sachs forecasts real GDP growth to accelerate to 7.9 per cent in FY17 from a projected 7.5 per cent in FY16, led by urban consumption demand and government capital spending amid muted global growth.

El Niño dynamics and a narrowing output gap, Goldman Sachs believes, could drive headline inflation gradually higher to 5.3 per cent in FY17 from 4.9 per cent in FY16.

“Risks to inflation forecasts are skewed to the upside due to the impact of a potential civil service wage hike, and structural supply-demand imbalance in food. We expect RBI to remain on hold through 2016,” says Goldman Sachs.