Given elevated valuations and recent strong performance, we believe that the risk-to-reward for Indian equities is less favourable at current levels and we lower our investment view from overweight to marketweight, said the report.
Goldman Sachs, which was strategically overweight on India since March 2014, has turned slightly cautious towards Indian market in 2018 and lowered its investment view to marketweight from overweight earlier.
Given elevated valuations and recent strong performance, we believe that the risk-to-reward for India equities is less favourable at current levels and we lower our investment view from overweight to marketweight, said the report.
Commenting on Nifty target levels, the global investment bank said that market is likely to consolidate heading into the elections and the 12-month target is at 12,000 as political uncertainty wanes and earnings accrue.
Goldman Sachs has been strategically overweight India since March 2014 on hopes of pro-growth government policies and structural reforms which would drive a pick-up in economic growth and profitability in India Inc.
While earnings have improved, Indian equities have almost doubled over the past 5 years and outperformed the region by 60 pp in USD terms which led to stretched valuations.
“Indian equities are most expensive in Asia (19x Cap-wgt/27x Avg PE) and trading at a record 58 percent premia to the region. At these levels, equities have historically posted negative returns over the next 3-6 months,” said the report.
Nifty has compounded at 14 percent over the past 5 years while earnings grew at 5 percent. The global investment explains that even though profit recovery is underway but this macro catch-up doesn’t warrant market upside. Indian equities are pricing in 17 percent earnings CAGR.
Commenting on the flows, Goldman Sachs said that domestic flows have slowed for the fourth consecutive month. Funds could potentially see lower equity flows as the yield gap between equities and bonds has fallen to 10-year lows.Sectorally, the global investment bank has upgraded defensive and exporters. It is overweight on banks, tech, and metals. The key downside risks remain a less stable government.