Goldman Sachs upgrades India to 'overweight': What's the reason?
What's the story
Goldman Sachs has upgraded India's equities rating to 'Overweight,' projecting a target of 29,000 for the Nifty index by the end of 2026. This marks a potential upside of about 14% from current levels. The investment bank's optimism is largely driven by expected earnings growth over the next two years and favorable government policies aimed at reviving economic growth.
Market analysis
Foreign de-risking led to large valuation de-rating
Goldman Sachs had downgraded India in October last year due to high valuations and an earnings slowdown. However, the bank's latest report notes that "as the year progressed and earnings cuts materialized," tariff headwinds soured sentiment further, leading to large foreign de-risking. Now, it sees a case for Indian equities outperforming over the coming year.
Growth drivers
RBI, government policies expected to support growth recovery
The investment bank's upgraded outlook is based on several factors. These include growth-supportive policies by the Reserve Bank of India (RBI) and government, an earnings revival, significant under-positioning by institutional investors, and de-rating in valuations. The report highlights that "easing measures from RBI announced this year (rate cuts, improved liquidity, bank deregulation), GST cuts and slower fiscal consolidation ahead should aid growth recovery over the next two years."
Market projections
FPI allocation at 2-decade lows
Goldman Sachs expects MSCI India profits to recover from 10% this year to 14% next year, aided by a better nominal growth environment. The bank also noted that foreign portfolio investors (FPIs) have net sold $30 billion worth of Indian equities over the past year. This has pushed foreign ownership and mutual fund allocation to near two-decade lows. However, recent reversals suggest improving foreign risk appetite and flows as earnings recover.
Market trends
Mass consumption recovery expected to gather steam
Goldman Sachs observed that Indian stocks' relative premium to Asia has normalized, cooling down valuations. The bank also expects mass consumption recovery to gather steam over the next two years amid "low food inflation, strong agricultural cycle, lagged effects of GST rate cuts, upcoming elections in key states through 2026-27 and potential wage hikes from the 8th Pay Commission." This should benefit consumer segments in industry.