Goldman Sachs taken in by Modi effect, expects earnings to expand by 11% as macro and micro scenario improves
It isn't only a woman's prerogative to change her mind. If you are Goldman Sachs, then you can very well change your outlook on a country's economy twice in three months.
After downgrading India in August this year, Goldman Sachs has upgraded India on Tuesday to market weight, thanks to the optimism stemming from a possible political change, easing of external account pressures and a stable earnings outlook.
Less than three months ago, like many other brokerages, Goldman Sachs had downgraded Indian stocks to underweight position as it saw downside risks to earnings and economic growth coupled with the possibility of a reversal in global liquidity.
In anticipation of a political change in India next year and improvement in India's external conditions, Goldman Sachs now has upgraded India. Nomura too has increased the March-end target for the Sensex to 22,000. Nomura had cut the Sensex target to 20,000 on expectations that the US Federal Reserve would start tapering its stimulus programme.
Prabhat Awasthi of Nomura in a note dated November 1, says: "The delay in Fed’s taper plans, significant positive surprises in trade data (this has been in line with our expectations and has underpinned our overweight rate cyclicals call) and the possibility of positive surprises on the political front have reignited bullish sentiment."
Goldman Sachs too has cited politics, macro and micro developments as key reasons for the change in stance. The Goldman Sachs report, authored by Timothy Moe, says: "Following a detailed set of meetings in Delhi and Mumbai, we believe it is appropriate to raise our investment stance, recognising the equity market has risen sharply from three quarter lows."
The foremost reason for its optimism is political change. BJP’s prime ministerial candidate, Narendra Modi, it seems is dominating economic concerns and Goldman Sachs cites that as a reason to upgrade India. Secondly, external pressures have moderated for now.
Thirdly, the brokerage believes there are early signs of cyclical pick-up and structural improvement as several government projects are making progress and coal bottlenecks are easing.
The brokerage also believes that the earnings outlook is stabilising and it has raised EPS growth forecast for calendar 2014 to 11% from 8%. The brokerage also hopes that retail redemption pressure could moderate, which could improve the equity demand-supply balance.
While it is difficult to counter the change in sentiment, stemming from a possible political change and the reversal in global liquidity, inflow of dollars into India a indeed a big positive. After the Fed's decision to delay the taper, foreign investors have invested $3.5 billion in Indian equities through September and October.
Other than this there is little evidence to suggest that economic growth is on the mend - the Purchasing Managers' Index also known as PMI continued to contract for services and manufacturing in October.
Banks continue to see a pile-up of stressed assets and the interest cycle isn't ready to turn just yet, which is critical for cyclical stocks to perform. Yet, brokerages are turning bullish on India. The change in stance could have more to do with sentiment than fundamentals.
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