GSAM likes Indian industrials, domestic sectors

Goldman Sachs Asset Management likes shares in Indian industrials and is tipping domestically-oriented sectors to start outperforming again on expectations that inflation will peak in coming months.

Prashant Khemka, who runs GSAM's Indian equities fund, said that while sticking to a bottom-up stockpicking approach, he is overweight the industrials sector.
Valuations are compelling for some domestically-oriented firms in the sector, Khemka told Reuters during a visit to London, adding: "Earnings for the industrials have already been curtailed enough for the near-term headwinds."
His top-10 holdings included bearings maker SKF India and Tata Motors, an automaker which has a dominant position in commercial vehicles.
While India's structural story is strong, with investors keen to capitalise on huge planned infrastructure projects, the market has been out of favour in 2011 due to near-double digit inflation and a hawkish Reserve Bank of India.
These have prompted analysts to pare growth and corporate earnings estimates. Mumbai stocks are down 11% this year.
Khemka said the economy had been in the process of digesting oil's sharp rise, a pass-through that usually lasts six-nine months before inflation eases towards the long-term 5.5% annual average. But oil prices have subsided off early-May highs and are tipped to fall further if the Chinese economy slows.
"Unless there is another surge in commodity prices, we believe we are at the peak of inflation worries," he said.
The fund is also overweight consumer discretionary stocks, betting they will gain as the rate rise cycle nears its end.
"Inflation and rate rises have the biggest negative delta on domestic-influenced sectors of the economy," he said. "If over the next six-nine months we see the situation normalise, we could expect domestically oriented sectors to do better.
Khemka also likes financials, holding ICICI, LIC Housing finance and IndusInd bank, though he acknowledged that slowing credit offtake and growth could hit banks' margins over the next 12-18 months.
"Banks have so far demonstrated a healthy ability to pass on the interest cost burden," he said, noting loan growth is still robust while barriers to entry into the banking sector are high.
Khemka said forecasts for Indian economic growth this year had already been pruned by 100 basis points while corporate earnings estimates had been trimmed 5-10%. The recent market falls have also brought down expensive valuations.
"Assuming the market multiple stays in line with the long-term average as it is currently, returns should be in line with corporate earnings growth of mid- to high-teens," he added.