Goldman Sachs Group Inc. has downgraded its outlook on Indian equities from overweight to neutral, citing concerns about weakening economic growth and corporate earnings.
The downgrade comes as India’s key stock indices experience sharp declines, with the NSE Nifty 50 Index seeing its steepest monthly fall since the onset of the pandemic.
In a research note released on Tuesday and reported by Bloomberg, Goldman Sachs strategists, including Sunil Koul, said,
“While we believe the structural positive case for India remains intact, economic growth is cyclically slowing down across many pockets.”
They added that 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.
“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, indicating that Indian equities could face a period of stagnation rather than a sharp correction.
As a result, the firm lowered its 12-month target for the Nifty 50 Index from 27,500 to 27,000, implying only a 10% upside from Tuesday’s closing levels.
High valuations and a challenging macroeconomic environment are expected to limit any significant gains in the near term.
The Nifty 50 currently trades at 20 times its 12-month forward earnings, higher than its five-year average of 19.4 times, signaling possible overvaluation.
Foreign sell-offs, and slowing earnings growth
Indian equities have been hit hard by a wave of foreign investor selling, with overseas funds withdrawing a net $7.8 billion in October, according to Bloomberg data.
This is the largest monthly outflow since March 2020, as foreign investors react to India’s weakening economic data and mounting inflationary pressures.
Analysts have widely raised concerns about a slowdown in earnings growth, citing challenges such as a high base, weakening demand, and shrinking margin tailwinds.
Other leading brokerages, including Motilal Oswal Financial Services, Nuvama Institutional Equities, and Axis Securities, forecasted that Q2 earnings growth would decline to a post-pandemic low, with profit growth expected to sharply moderate to around 2% for the July-September period.
According to MOFSL, this would represent the slowest earnings growth for Nifty companies in 17 quarters.
In terms of sector outlook, Goldman Sachs remains overweight on automobiles, telecom, and insurance, while upgrading realty and internet sectors to ‘overweight.’
Conversely, it downgraded cyclicals such as industrials, cement, chemicals, and financials.
The brokerage advises investors to prioritize quality, earnings visibility, and targeted alpha themes to navigate the current volatility in Indian equities.
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