While there may not be much room for the already elevated valuations across Asia-Pacific markets (ex-Japan) to expand further, returns in 2015 will be driven by earnings growth improvement, says Goldman Sachs.
In its portfolio strategy for the coming year, the foreign brokerage lists India as one of the overweight markets as it expects it to deliver the highest EPS growth (18% for FY16) among its Asia-Pacific (ex-Japan) counterparts.
Correspondingly, it pins a year-end target of 9,500 for the 50-share Nifty, depicting 11% gains from the current levels.
Adjusting for exchange rate moves and dividend yield, India is seen delivering 13% of the total returns in US dollar terms in 2015, lower than Taiwan (20%) and China (17%), which are also assigned overweight allocations. Indonesia, the recently upgraded market by Goldman, is seen delivering returns similar to India.
While India’s market valuations, at one-year forward earnings multiple of 17.1, look expensive compared to history as well as peers, the brokerage expects global fund flow and interest of domestic investors to support the market momentum.
“With emerging market and Asia ex-Japan mutual fund maintaining overweight of 435 bps and 665 bps on India, investors question us whether India is a crowded trade,” said Timothy Moe, chief Asia-Pacific regional equity strategist.
However, global funds and ex-US funds that collectively account for more than 60% of the $967 billion equity mutual fund pie maintain relative underweight of 40 bps on India compared to benchmark MSCI index and may drive the next round of inflow, added Moe.
Goldman has assigned an overweight allocation to banks, technology and industrial sectors even as it noted that the first two traded at elevated valuations compared to last five years. Collectively, these two sectors are seen accounting for nearly 40% of Goldman’s FY16 EPS growth estimates for the MSCI India universe.
Besides a turnaround in the interest rate trajectory and a reversion in GDP growth to 6.5%, increasing clearances and tapering doing-business blockages are also seen helping a recovery of the banking space as corporate cash flows improve.
Interestingly, even after terming PSU reforms, fuel reforms and coal-auctioning among the preferred themes or areas of opportunity in 2015, the foreign brokerage has assigned a market-weight allocation to the energy sector where it expects FY16 EPS to grow 14%.
While autos, materials and utilities have also been assigned market-weight, consumer staples, healthcare and telecom space have been allocated underweight compared to the benchmark MSCI index.