Goldman Sachs Sees Delayed Recovery, Downgrades Indian Equities By A Notch

Nifty 50 has recouped some of the losses after its biggest slide in more than a decade, tracking the global Covid-19 selloff. Yet, Goldman Scahs downgraded Indian equities by a notch as it expects domestic markets to lag regional peers.

The rebound is a bear market rally, something that has been common in history, the brokerage said in a note authored by Sunil Koul and Timothy Moe. For a lasting bottom, Goldman has been monitoring a set of conditions that include flattening infection curves, visibility on the depth and duration of economic disruptions, sufficiently large policy stimulus and deep undervaluation of assets.

For India, with rising new confirmed cases, an extension of the nationwide shutdown by another three weeks until May 3 and limited fiscal easing so far compared to other major economies, the economy could recover more gradually than some of the North Asian peers, wrote Koul. While markets may not retest fresh lows given reduced global risks, Koul said Indian equities are likely to relatively lag on expectations of a slower recovery unless a more forceful policy stimulus is announced.

As the new coronavirus business stalled global trade, Nifty 50 tumbled 38 percent from its January peak tracking, before recovering 20 percent from its March lows.

Goldman Sachs, however, downgraded India to marketweight from overweight within Asia on delayed recovery and expensive valuations. It cut Nifty target to 9,600 by June 2021, down from 10,800.

The investment bank expects a deeper global recession and a significant contraction in economic activity in India. As a result, it sees profit of Nifty 50 companies to decline by 13 percent on a yearly basis in 2020 before a 23 percent recovery next year.

Goldman raised infotech and defensive sectors including staples, telecom and healthcare to ‘overweight’ on higher earnings resilience, and lowered financials and domestic cyclicals to ‘underweight’. Its favoured themes include ‘oversold’ quality growth stocks, companies with strong balance sheets and high free-cash-flow yields.

Sector Views

• Prefers large caps over mid caps and defensives over banks and domestic cyclical stocks.
• Raised defensives to ‘overweight’ as investors grapple with the extent of economic disruptions due to Covid-19 and shutdowns.
• Upgraded consumer staples as earnings are likely to be relatively less impacted compared to other domestic cyclical sectors.
• Upgraded telecom to ‘overweight’ as they look relatively resilient in the near-term given rising demand for data and connectivity.
• Upgraded pharma given minimal disruptions to manufacturing owing to the essential services tag and low valuations.
• Upgraded infotech as earnings impact is likely to be limited given the sharp depreciation in the rupee, the multiple margin levers and valuations.
• Downgraded financials, select domestic cyclicals and private banks to ‘marketweight’. Stayed ‘underweight’ PSU banks and non-bank lenders.
• Downgraded industrials to ‘underweight’ as government spending is likely to focus away from public infrastructure.
• Downgraded autos and consumer discretionary to ‘underweight’ due to lockdown disruptions.
• Downgraded the metals sector to ‘underweight’ as prices are unlikely to bottom given the large demand shock and rising inventories.