Goldman, Macquarie up Nifty bets

Tags: News
Two foreign brokerages, Goldman Sachs and Macquarie, have given positive outlook for Indian stocks, citing improving macros and reform steps undertaken by the government over the past 15 months, even while refraining from overtly populist measures despite elections.

Reacting to the reports, the Sensex hit a new intra-day high of 22,040.72, while NSE’s Nifty touched a high of 6,574.95. Both Sensex and Nifty closed below their record highs on profit taking. Sensex closed at 21,832.61, up 22.81 points, or 0.10 per cent, and Nifty at 6,516.65, up 12.45 points, or 0.19 per cent from the previous close.

Upgrading India to “overweight” Goldman Sachs has projected Nifty to reach 7,600 in 12 months, up nearly 17 per cent from the current level. Macquarie has pointed out that the Sensex has moved up 8 per cent over the past month, and historical evidence suggested that the index could easily go up another 15-20 per cent due to the re-rating of the price-to-earnings ratio alone.

“We now expect domestic fundamentals to improve, as growth recovers in the second quarter. Corporate earnings downgrades seem to have bottomed out, with more signs of improvement emerge in the investment cycle. Headline valuations have expanded recently, but cyclical sectors remain inexpensive compared with history and are relatively under-owned,” Goldman Sachs said, in a report.

Added Macquarie: “The Indian economy has bottomed out, in our view, with GDP likely to post 4.7 per cent growth in FY14 compared with 4.5 per cent in FY13. The government has contained fiscal deficit at 4.6 per cent of GDP, CAD has come down to just two per cent of GDP and the inflation trend is moderating (though still high).

The government has pushed several reforms in the last 15 months and has refrained from overtly populist measures despite elections, building a strong foundation for recovery.”

In the past elections, strong governments were greeted with rallies in the market, with stocks moving up 20-25 per cent, Macquarie said, adding rallies such as the recent one do start 2-3 months prior to elections as expectations build up and continue to move up if election results are favourable. In such a scenario, cyclical sectors outperform defensives.

“Upcoming parliamentary elections in April could have an important impact on the progress of reforms,” said Goldman Sachs. “History suggests equities in both India and Indonesia trade well leading up to elections, partly supported by favourable flows, but with higher volatility (particularly in Indonesia; which also has presidential elections in July). Our analysis of past election moves, valuation and flows suggests India may have more room for a pre-election rally than Indonesia,” said the US brokerage.

“While the ongoing macro adjustments (slower credit growth, demand-side tightening) have impacted near-term growth in both India and Indonesia, we expect GDP growth to bottom out in Q1 of 2014 (January-March) and then pick up from Q2, albeit gradually,” Goldman Sachs said.

Moreover, the corporate earnings downgrade cycle has bottomed out, in Goldman Sachs view and “we see more signs of improvement in the investment cycle (margin stabilisation for Indian industrials in Q3 of FY14 results, better-than-expected PMI reading, moderation in Inflation) and further progress on large industrial projects (DMIC projects launched in two states of India, premium rescheduling for stressed road projects in India). We expect mid-teens earnings growth both this year and next (12/17 per cent and 12/15 per cent for India) with high ROEs (16-20 per cent) compared to low-teens for the rest of the region.”

Macquarie said investors should brace up to a possibility of a hung parliament after the elections. “While most opinion polls are pointing to a possible NDA victory in elections, 1996 and 1998 elections remind us of the grim possibility of a hung parliament, when the NDA government lost by just one vote. Markets can move down 10 per cent or so post such an event. Stick to quality,” it said.


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