Why Goldman Sachs has downgraded Indian equities and Nifty's target
What's the story
Goldman Sachs, a leading global brokerage firm, has tactically downgraded Indian equities from 'overweight' to 'neutral.'
The adjustment is part of its Asia/Emerging Markets allocations and anticipates a 'time correction' in the next three to six months.
The firm suggests high valuations and an unfavorable backdrop could limit potential gains despite strong domestic flows making a price correction unlikely.
Market slowdown
Concerns over slowing economic growth and profits
Goldman Sachs has emphasized that although the structural appeal of Indian equities is intact, economic growth and profits are slowing down.
Other analysts share the view and have expressed concerns over a slowdown in earnings growth due to high base effects, faltering demand, and diminishing margin tailwinds.
Major brokerages including Motilal Oswal Financial Services (MOFSL), Nuvama Institutional Equities, and Axis Securities have forecasted a steep decline in Q2 earnings growth to a post-COVID low.
Target revision
Goldman Sachs revises Nifty target amid earnings growth concerns
In light of these developments, Goldman Sachs has revised its 12-month Nifty target down to 27,000 from the previous forecast of 27,500.
The new target still implies a potential upside of 9%.
However, for the short-term, the firm predicts that the Nifty could drop by a percent to around 24,500 in the next three months before recovering some ground to rise by 3% to reach approximately 25,500 in six months.
Sector analysis
Goldman Sachs's sector outlook and investment advice
Goldman Sachs continues to hold an 'overweight' stance on automobiles, telecom, and insurance sectors while upgrading realty and internet sectors to 'overweight.'
However, it has downgraded cyclicals like industrials, cement, chemicals, and financials.
The brokerage recommends investors to focus on quality earnings visibility and targeted alpha themes to sail through the current volatility in Indian equities.
Market challenges
Indian stocks face challenges amid weak earnings
Goldman Sachs's cautious stance on Indian equities comes amid growing concerns over the sustainability of corporate earnings as consumer spending weakens and commodity prices rise.
India's record stock rally is showing signs of fatigue, with the benchmark Nifty 50 index sliding over 5% in October, its worst month in over four years.
Bernstein Societe Generale Group's Asia quant strategists have also downgraded Indian stocks due to high valuations and predicted further upside for Chinese equities driven by a policy boost.