A Goldman Sachs report says Indian domestic mutual funds continue to remain strong buyers of Indian equities and have outpaced foreign institutional investors in 2017. From the begining of 2017, domestic MFs have bought equities worth $15.3 billion against $8 billion by foreign investors.
Sachs, in its Economic and Strategy Outlook Report for 2018, has reaffirmed its overweight stance on Indian equities and indicated a target of 11,600 for the benchmark Nifty in December 2018. The investment bank expects earnings per share (EPS) to grow at 18% in 2018 and at 17% in 2019. It sees improving GDP growth and waning impact of GST and demonetisation fuelling earnings. The report said Indian domestic mutual funds continue to remain strong buyers of Indian equities and have outpaced foreign institutional investors in 2017. From the begining of 2017 domestic mutual funds have bought equities worth $15.3 billion against $8 billion by foreign investors. “Indian investors are much more in control of their destiny, the domestic money is what is really setting the price now,” said Timothy Moe, Cheif Asia Pacific Regional Equity Strategist, Goldman Sachs.
The report took note of a steady and significant increase in systematic investment plans (SIPs). However, there is a long way to go for the financialisation of savings in India as only 4% of the Indian household financial assets is invested in equities. Among sectors, Goldman Sachs said it has upgraded its views on public sector banks after recent developments. “The logjam of balance sheet problems has now been addressed, maybe not entirely, but to a very substantial degree,” Moe said.
Underlining a note of caution, in its otherwise optimistic view, Goldman Sachs held that the valuation of equities is indeed high in India as they are trading above one standard deviation to the higher side of the 15 year historical PE range. “If the earnings don’t come through, then markets are vulnerable to a downturn,” Moe said. Goldman Sachs said it forecasts real GDP growth to accelerate to 8% in FY19 from a projected 6.4% in FY18, as the drag from shocks of demonetization and GST implementation fade. It expects the positive effects of public sector recapitalisation to show up in the latter part of the next year.The bank recapitalisation could break the vicious cycle between higher non-performing loans, weaker bank balance sheets, and slower credit growth that has inhibited the acceleration in India’s growth cycle over the past few years, the report said.
The report added that bank recapitalisation could also lower borrowing costs further, on the back of increased competition among banks as they look to push lending growth with healthier balance sheets. The report added that government’s ongoing push on infrastructure, particularly roads, will continue to support investment growth next year. The government has announced plans to build more than 80,000km of roads across the country over the next 5 years, with a total investment of $106 billion or 0.8% of GDP). This implies a sharp jump in road construction to an average of 46km per day from 23km per day in FY17.
Goldman Sachs expects headline inflation to accelerate to 5.3% in FY19 from an expected 3.4% in FY18, due mainly to a pickup in food and commodity prices. “Food price inflation has been particularly benign this year on the back of favourable weather conditions, solid food production in 2016, and temporary weakness in demand following demonetisation,” the report said. It sees food inflation normalising over the next 12 months, with gradual increases in rural wage growth and minimum support price (MSP) hikes.