MUMBAI: Goldman Sachs has raised Indian stocks to overweight in hopes that the earnings recovery will lead to the rally. Goldman Sachs was a structural bull in India, but had dropped India to market weight in April on national shutdown concerns, increased pandemic cases, and expectations of a significant contraction in domestic activity in the absence of fiscal space.
However, the global brokerage firm believes that the investment case for India has improved now and has therefore updated Nifty to 14,100 by the end of 2021, indicating an 11% increase from current levels. Indian benchmarks have rebounded more than 60% from the lows reached in March, while reaching new all-time highs this week.
“First, India has lagged this year underperforming the region by 11 percentage points in US dollar terms. Indian stocks are more positively sensitive to improving prospects for a vaccine, so we expect a lagging rally to ‘catch up’ given the flow of positive news on the vaccine front (which could spur a faster recovery than expected), “he said in a Nov. 11 note.
As the economy recovers from the pandemic-induced contraction, Goldman Sachs expects corporate profits to rebound 27% next year and a further 21% in 2022, after an expected 11% drop year-on-year this year. “While valuations remain extended and could see some pressure, we expect more market gains driven by earnings recovery,” he said.
Sectorally, he expects cyclical sectors to perform better as the economic recovery continues to accelerate.
As the domestic macroeconomic recovery recovers, Goldman Sachs economists expect growth momentum to continue with a strong rebound in real gross domestic product (GDP) growth to 10% and 7.2% year-on-year over the next two years.
Overall, Goldman Sachs expects a total return of 18% in US dollars for Asia Pacific regional stocks in 2021 as the global economy recovers from the pandemic shock and regional earnings rebound from suppressed levels. He said a pickup in growth and a delay in policy tightening create a sweet spot for stocks, especially with mild investor positioning.
In addition to India, Goldman Sachs is overweight in China and Korea.
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