Indian equities could relatively underperform peers in Asia Pacific (APAC) region next year, according to Goldman Sachs. This is based on the analysts’ two baseline macro expectations, stated its India 2023 Equity Outlook report.
“First, as 2023 unfolds and global macro backdrop improves (spurred by Fed pivot and dollar turn), this could lead to better performance from more cyclical parts of the (APAC) region. Secondly, China and China-related markets could trade firm on China reopening catalyst, which could impact India’s relative returns,” stated the report.
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Goldman Sachs has a marketweight (MW) stance on India to start the year. It expects Nifty to reach 20,500 by end of 2023, which implies a 12% price return, led by healthy earnings growth and only a modest P/E compression.
While the macro picture is discouraging, India’s earnings growth is expected to be stronger than the region’s. Driven by domestic demand, India Inc’s earnings growth is expected to be at 15% in 2023 and 2024, which is almost twice the profit growth of the region at 8%. The analysts also expect the profit growth to beat the region’s growth figure in the medium term, with India expected to post an earnings growth of 14% in the next five years and the region to post 10% CAGR over the same period. Earnings revision trends are also indicating this, said the report -- MSCI India CY2022 EPS has seen 8% cuts this year and 2% cut over the past month, while the region indices’ EPS have seen a higher 11% cut year-to-date.
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Banks, energy (Reliance) and select domestic cyclicals are expected to be the major contributors to the overall index earnings over the next year.
Macro challenges
While domestic-oriented South Asian markets such as India historically have outperformed globally-sensitive North Asian markets in a high-interest-rate scenario with a looming recession risk, the coming year may play out differently. The report stated, “as the year progresses, 2Q (in the calendar year 2023) could be a potential inflection point as the Fed goes on hold, the dollar peaks and markets begin to anticipate improving economic growth in 2024. This would suggest, that more cyclical parts of the region could perform better, while India (which has significantly outperformed this year), could relatively lag”.
China’s reopening could also affect India’s relative underperformance. “While our base case remains for China re-opening in Q2 next year, market is likely to anticipate this, especially when fueled by signs of policy shifts. We estimate re-opening could drive a 20% uplift in the MSCI China index. With Indian equities having outperformed China by about 25% ytd (and more than 60% since last year) and offering low correlations to China equities, we expect Indian equities to underperform in a China ‘reopening’ rally,” stated the report.
Weak earnings in ex-financials
Over 2023 and 2024, while India’s broader markets are expected to most the strong mid-teen growth in earnings, ex-financials may post only 6% growth in earnings (much lower than 20% in 2022). The slowing down of growth will be because of “the normalization in commodity-related earnings from high base, fading of the re-opening boost and slowdown in tech revenues on weak global demand”.
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