Nomura, Credit Suisse, Goldman Sachs turn cautious on Indian equities

Analysts at Credit Suisse say the overall trend remains down and expect the Indian equities to grind lower in the coming months

Foreign brokerages such as Nomura, Goldman Sachs and Credit Suisse have turned cautious on Indian equities. 

In a recent report, Saion Mukherjee, head of India equity research at Nomura, said he expects the markets to slip further from the current levels and has cut the target level for the Nifty50 index.

“The market valuations have corrected significantly from 18.8x at the peak in August 2018 to 16.1x one-year forward earnings currently. The valuations were stretched, given the rise in yields since the start of the year. To a large extent, the recent market fall has corrected the excessive valuations. However, they are still not attractive enough and further 5-10 per cent downside in the near term cannot be ruled out,” Mukherjee wrote in the report co-authored with Neelotpal Sahu and Sanjay Kadam.

Based on 15x March 2020 Nifty50 earnings, Nomura pegs the Nifty target at 11,270 for September 2019 (previously 11,892 for June 2019) – translating into an upside of around 9 per cent from the current levels. From its peak level of 11,760 in late August 2018, the Nifty50 has tumbled nearly 12 per cent to become the worst-performing equity market globally – wiping out year-to-date (YTD) gains.

IL&FS default and its contagion impact on liquidity, pressure on the current account and the fiscal situation, rising Brent crude oil prices and a sliding rupee are some factors that led to a significant risk aversion in the market, said brokerages.

Though analysts at Credit Suisse do not rule out the possibility of a small short covering in the near term, they too, said the overall trend remains down and expect the Indian equities to grind lower in the coming months.

Downward trajectory

• Markets expected to slip further from current levels

• Nomura pegs the Nifty target at 11,270 for September 2019 

• From its peak of 11,760 in August, the Nifty has tumbled nearly 12%

• The index is the worst-performing equity market globally 

• Possibility of small short covering in the near term not ruled out 

• IL&FS default and its contagion impact on liquidity, pressure on current account and fiscal situation, rising oil prices and sliding rupee key factors

“This stance is based on our expectation of further earning downgrades, mostly led by financials and consumer discretionary, including autos. The market was factoring in a 25 basis point (bps) rate hike by the Reserve Bank of India (RBI) in the October meeting. This has now been pushed to the next meeting. We do not expect a further rise in the benchmark 10-year yield unless the rupee and crude oil prices rise further,” said Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management.

As regards sectors, Nomura has downgraded financials to underweight from its earlier overweight stance, while maintaining higher weight rating for private banks. It remains underweight on cement, power and telecom; and overweight on infrastructure.

“Rising trade deficit (resulting in steep rupee depreciation), driven primarily by rising oil price and a slowdown in credit flow through NBFCs have emerged as risks to economic growth in the near term. Maruti Suzuki, Mahindra & Mahindra, JSW Steel, Larsen & Toubro, Apollo Hospitals, ICICI Bank, HDFC Bank, Lupin, HCL Technologies and AIA Engineering remain our top picks,” the Nomura report said.

After remaining ‘strategically overweight’ on Indian equities since 2014, global research and brokerage firm Goldman Sachs also cut its India rating to ‘market-weight’ from ‘over-weight’ recently. It expects the markets to consolidate ahead of the general elections and maintains a 12-month Nifty50 target                  of 12,000.

Indian equities, it said, doubled over the past five years and outperformed the region by 60 percentage points (pp) in US dollar terms. 

“Given the elevated valuations and the recent strong performance, we believe the risk-reward for Indian equities is less favourable at the current levels,” wrote Sunil Koul of Goldman Sachs in a recent co-authored report.