Foreign brokerages such as Nomura, Goldman Sachs and Credit Suisse have turned cautious on Indian equities. In his recent co-authored report, Saion Mukherjee, head of India equity research at Nomura says he expects the markets to slide further from the current levels.
“The market valuations have corrected significantly from 18.8x at the peak in August 2018 to 16.1x one-year forward earnings currently. The valuations were stretched, given the rise in yields since the start of the year. To a large extent, the recent market fall has corrected the excesses in valuations. However, they are still not attractive enough and further 5 – 10 per cent downside in the near term cannot be ruled out,” Mukherjee wrote in a co-authored report with Neelotpal Sahu and Sanjay Kadam.
Based on 15x March 2020 Nifty50 earnings, Nomura pegs the Nifty target at 11,270 for September 2019 (previously 11,892 for June 2019) – translating into an upside of around 9 per cent from the current levels.
From its peak level of 11,760 in late August 2018, the Nifty50 has tumbled nearly 12 per cent to become the worst-performing equity market globally – wiping out year-to-date (YTD) gains.
IL&FS default and its contagion impact on liquidity, pressure on the current account and the fiscal situation, rising Brent crude oil prices and a sliding rupee are some of the factors, brokerages say, has led to a significant risk aversion in the market.
Though analysts at Credit Suisse do not rule out the possibility of a small short covering in the near term, they too, say the overall trend remains down and expect the Indian equities to grind lower in the coming months.
“This stance is based on our expectation of further earnings downgrades mostly led by financials and consumer discretionary, including autos. The market was factoring in a 25 basis point (bps) rate hike by the Reserve Bank of India (RBI) in the October meeting, which is now pushed out to the next meeting. We do not expect a further rise in the benchmark 10-year yield unless the rupee and crude oil prices rise further,” says Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management.
As regards sectors, Nomura has downgraded financials to underweight from its earlier overweight stance, while maintaining higher weight rating for private banks. They remain underweight in cement, power and telecom; and overweight on infrastructure.
“Rising trade deficit (resulting in steep rupee depreciation), driven primarily by rising oil price and a slowdown in credit flow through NBFCs have emerged as risks to economic growth in the near term. Maruti Suzuki, Mahindra & Mahindra, JSW Steel, Larsen & Toubro, Apollo Hospitals, ICICI Bank, HDFC Bank, Lupin, HCL Technologies and AIA Emgineering remain our top picks," the Nomura report says.
After remaining ‘strategically overweight’ on Indian equities since 2014, global research and brokerage firm Goldman Sachs also cut its India rating to ‘market-weight’ from ‘over-weight’ recently. It expects the markets to consolidate ahead of the general elections and maintains a 12-month Nifty50 target of 12,000.
Indian equities, it said, have doubled over the past five years and have outperformed the region by 60 percentage points (pp) in USD terms. “Given the elevated valuations and the recent strong performance, we believe the risk / reward for Indian equities is less favourable at current levels,” wrote Sunil Koul of Goldman Sachs in a recent co-authored report.