Goldman Sachs cuts Indian stocks to neutral amid slowing economic growth

By John Cheng   

Goldman Sachs Group Inc. tactically lowered Indian equities to neutral from overweight as slowing economic growth dents the outlook for corporate earnings.   

“While we believe the structural positive case for India remains intact, economic growth is cyclically slowing down across many pockets,” strategists including Sunil Koul wrote in a note on Tuesday. Worsening earnings sentiment, an accelerating pace of earnings-per-share cuts and a weak start to the September-quarter results season indicate an impact on profits, they added.

 

High valuations and a less supportive backdrop could limit the near-term upside for local shares, they said.

 

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The cautious stance underscores growing concerns over the sustainability of company earnings amid weakening consumer spending and increasing commodity prices. India’s record stock rally is already showing signs of fatigue, with the benchmark NSE Nifty 50 Index sliding more than 5 per cent in October, on track for its worst month in more than four years.

 

“A large ‘price correction’ is less likely given support from domestic flows, but markets could ‘time correct’ over the next three to six months,” Goldman Sachs strategists said. They lowered the 12-month target for the NSE Nifty 50 Index to 27,000 from 27,500 previously, implying a 10 per cent upside from Tuesday’s close.

 

The Nifty gauge currently trades at 20 times its 12-month forward earnings, above its five-year average of 19.4 times. Foreign funds have sold $7.8 billion of Indian equities on a net basis this month through Monday, poised for the biggest withdrawal since March 2020, according to data compiled by Bloomberg.

 

Goldman had raised Indian stocks to overweight late last year, citing earnings growth over two years despite global macro headwinds.  

Still, not everyone is tuning bearish on Indian equities, which have been trading more expensive due to the nation’s faster economic growth. For UBS Global Wealth Management, now is a good time to “buy the dip” in Indian stocks, as the soft patch in the nation’s growth and earnings appears transitory.

 

Investors should continue to raise “foundational or strategic asset allocation into the market,” as the slowdown is due to one-off factors and economic growth will resume, Tan Min Lan, Asia-Pacific head of UBS’s Chief Investment Office, said in a Bloomberg TV interview.