With the NSE Nifty 50 jumping 18% so far from its recent low on March 23, curious market participants are eager to call a bottom and claim that the worst is over for Indian equity markets. However, global brokerage Goldman Sachs has warned that the recent Nifty rally is not the end of the bear market that the world entered last month. Economic recovery for India could be more gradual than other north Asian peers, Goldman Sachs said in a research note. “While markets may not retest fresh lows given reduced global risks, we believe Indian equities are likely to relatively lag the region on expectations of a slower recovery,” the report said.
Goldman Sachs has cut India to ‘Marketweight’ within its Asian allocation. “Thematically, we prefer large-caps over mid-caps and defensives over banks and domestic cyclicals,” the firm said. Financial sector earnings are expected to remain tepid as loan growth takes a hit, the report said, adding that meanwhile, pharmaceutical sector earnings will likely remain strong. The sectors on which Goldman Sachs is bullish include consumer staples and telecom, which it has upgraded to ‘overweight’, along with pharma and information technology. On the other hand, it said that automobiles, metals/mining,energy, industrials, cement are a few sectors that are expected to see a significant fall in earnings owing to consumer discretionary and capex sensitivity.
Goldman Sachs has termed the current rally seen in India equity markets as a bear market rally. As an example, it pointed out to four distinct rallies of 12%-25% that Nifty saw in the year 2008, while being in an overall bear market, which erased 60% of the index. “For markets to make a lasting bottom, we have 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 and position reduction,” the report said. FII selling seen during March was 0.4% of market capitalization, significantly less than the FII sell off seen in 2008, which was 0.8% of the market capitalization.
The firm warned that the global equity markets have rallied on signs of a flattening infection rate. However, Goldman Sachs also cautioned investors that its views may not hold ground in case of more forceful policy stimulus. India has just seen a 1% of the GDP as a fiscal stimulus pushed by the finance ministry earlier last month, whereas the average across the world is 4.7% of the GDP.