Mumbai: Goldman Sachs has downgraded Indian equities for the first time in more than four years citing expensive valuation, moderation in domestic flows, multiple macro headwinds and consolidation ahead of the 2019 general elections.
The global investment bank has been strategically overweight since March 2014 as it expected pro-growth government policies and structural reforms to drive a pick-up in the economic growth and a recovery in corporate profits.
“While earnings have improved, Indian equities have almost doubled over the past 5 years and outperformed the region by 60 percentage points in US dollar terms. Given elevated valuations and recent strong performance, we believe the risk/ reward for Indian equities is less favourable at current levels and we lower our investment view from overweight to market weight,” it said adding that the year to date rally in the market has largely been concentrated in a few large caps while the underlying breadth remains weak suggesting waning momentum.
According to it, Indian equities are the most expensive in Asia and trading at a record 58 per cent premium to region.
At these levels, equities have historically posted negative returns over the next 3-6 months. “Over the past 5 years, Nifty has compounded at a 14 per cent annual rate while forward earnings grew at only 5 per cent CAGR. This suggests the much-awaited ‘catch up’ in earnings doesn’t warrant further market upside in the near-term,” it added.
On the macro front, economists at Goldman Sachs believe that the real GDP growth is likely to moderate sequentially for the remainder of FY19 on account of rising commodity prices, tighter financial conditions and recent weak activity data.
Additionally, the rupee volatility is likely to remain a source of concern for dollar-based investors.
Goldman Sachs also noted the rising redemption pressure faced by domestic mutual funds that had pumped in $47 billion since 2015. While domestic equity mutual funds have continued to receive inflows, the pace of inflows has slowed for four consecutive months. We also note that the ratio of gross redemptions to sales has picked up recently, suggesting early signs of rising redemption pressure, it said.
While the markets are not pricing in any election related event risk, Goldman Sachs said the possibility of a less stable government is likely to weigh on markets.
