The NSE Nifty 50 might be up almost 20% from the lows it tested in the last week of March, volatility could be dropping and investors could be cheering, but global brokerage and research firm Goldman Sachs is not convinced. In a research note on Thursday, the brokerage claimed the current rally was just another bear market rally, while it trimmed India’s weightage in its Asian allocation. This leaves investors with a burning question, how should they position themselves if the equity markets are going to fall again. Go defensive and prefer large caps, said Goldman Sachs.
For Indian equity markets, the global risks might have reduced but, according to Goldman Sachs, the domestic risk is still significant. Given the current market scenario the brokerage firm has tilted towards defensive sectors in its recommendations over banks and domestic cyclicals. To tide over the mayhem, large-caps are being preferred over mid-caps. “ We think defensives will continue to outperform over the coming quarters as investors grapple with the extent of economic disruptions due to COVID-19 and shutdowns,” the report said. Consumer staples, telcos have been upgraded to overweight, believing that earnings for these particular sectors are expected to be less impacted. Pharmaceuticals have also upgraded owing to the surge in exports and manufacturing that the sector is witnessing.
On the other hand, financials and select domestic cyclicals have been downgraded. “We think banks are likely to remain under pressure near-term given earnings headwinds on lower credit demand, higher risk aversion and potentially increasing credit costs. We lower private banks to market weight as their balance sheets are relatively stronger and are likely to bounce back and gain market share once the situation normalizes,” Goldman Sachs said.
Going forward Goldman Sachs is betting on quality stocks with a proven track record. “ We like the theme of stable growth in the region as we believe investors will stay with quality stocks that have proven track records of delivering stable revenue and earnings growth. With the correction in markets, valuations for some stable growth stocks have come to attractive levels,” The report said. Under this theme, stocks that have fallen 10% year-to-date and are currently trading below average valuations will be picked. Firms with strong balance sheets are also being eyed by Goldman Sachs, hoping that companies with relatively stronger balance sheets tend to outperform those with weaker balance sheets during periods of economic deceleration.
“We think in the current challenging environment, markets are likely to reward companies that are generating high free cash flows and thus could manage their debt (deleveraging) and other obligations, including dividend payouts,” the report said. Under this theme, Goldman Sachs is screening for stocks with free cash flow yield of at least 5%.