Goldman Sachs Group Inc. downgraded their outlook for Indian stocks from overweight to neutral. They cited concerns over the weakening of economic growth and earnings by corporations.
India’s major stock indexes are experiencing sharp drops, and the NSE Nifty 50 Index is seeing its biggest monthly drop since the outbreak of the Pandemic.
Goldman Sachs analysts, Sunil Koul included, stated in a Tuesday research note, as reported by Bloomberg.
While we still believe that India’s structurally positive story is intact, the economic growth has slowed down in many areas.
The report said that a worsening of the earnings outlook, an acceleration in earnings per share cuts and a poor start to September quarter results show an impact on profit.
Goldman Sachs analysts said that a large “price correction” is unlikely given the support of domestic flows. However, markets may “time-correct” over the next 3 to 6 months, suggesting Indian stocks could experience a period stagnation, rather than a significant correction.
The firm has lowered the 12-month target of the Nifty50 Index, from 27,500 down to 27,000, which is only 10% higher than Tuesday’s close.
In the short term, we expect that high valuations as well as a difficult macroeconomic climate will limit gains.
Nifty 50 trades for 20 times the 12-month earnings ahead, which is higher than its average five-year value of 19,4 times. This could indicate an overvaluation.
Earnings growth is slowing down due to foreign sell-offs
Bloomberg reported that foreign funds withdrew a total of $7.8 Billion in October from Indian stocks.
The largest monthly outflow has been since March 2020 as investors respond to India’s weakened economic data and rising inflation pressures.
Many analysts have expressed concern about the slowdown of earnings growth. They cite challenges like a low base, a weakening market, and declining margins.
The forecasts of other leading brokerages such as Motilal Oswal Financial Services and Nuvama institutional Equities were that the Q2 profit growth rate would be at a low post-pandemic level, while profits growth was expected to moderate sharply to around 2% in the period between July-September.
MOFSL reports that this is the lowest earnings growth rate for Nifty companies since 17 quarters.
Goldman Sachs’ sector outlook remains overweight for automobiles, insurance and telecom while real estate and the internet are upgraded to “overweight”.
It downgraded the cyclicals like industrials, chemical, cement and financials.
To navigate current volatility, the brokerage recommends that investors prioritize quality, earning visibility and targeted alpha themes.
This is a post about speed bumps. Goldman Sachs lowers the Nifty 12-month Target to 27K, but this may change as new information unfolds.
