Goldman Sachs is of the view that ‘Value’ and ‘Cyclical’ parts of the markets will perform better in coming months with investors rotating out of ‘safe haven’ or ‘quality’ stocks as political uncertainty continues to fade.
The market started the day on a firm footing on April 3 after seeing a relentless up move in the past few days. Benchmark indices hit all-time highs in early trade.
While Sensex opened at all-time high of 39,167, Nifty crossed its previous high of 11,760.
Global investment banks such as BNP Paribas as well as Goldman Sachs recently upgraded India to ‘Overweight’ citing attractive valuations, continuity of flows, recovery in earnings trajectory and hopes of formation of a stable government at the Centre.
BNP Paribas upgraded India to ‘overweight’ from ‘neutral’ on April 1 and also raised its December-end target for Sensex to 42,000 from 40,000 earlier. Meanwhile, Goldman Sachs sees Nifty50 hitting 12,500 in the next 12 months.
In terms of specific stocks, BNP Paribas included Axis Bank, IndusInd Bank, and HCL Technologies in its model portfolio and excluded M&M, Infosys and Tech Mahindra from the list.
Under the BNP Paribas Asia Model Portfolio, it likes Eicher Motors, Maruti Suzuki, Titan Company and ITC in the discretionary space. Under financials, top picks include HDFC Bank, Kotak Bank, Axis Bank and IndusInd Bank.
In the TMT space, HCL Technologies is the top bet, and Reliance Industries in the energy space.
On the other hand, Goldman Sachs is of the view that ‘Value’ and ‘Cyclical’ parts of the markets will perform better in coming months with investors rotating out of ‘safe haven’ or ‘quality’ stocks as political uncertainty continues to fade.
Under the theme ‘value’ stocks within cyclical sectors that are rated buy include stocks like State Bank of India, ICICI Bank, L&T, M&M, Adani Ports, JSW Steel and Ashok Leyland.
“In terms of entry point, the list of stocks is currently 17% below its 1-year high and trades at mid-cycle valuations suggesting attractive risk-reward,” said the report.
Oversold midcaps with positive earnings momentum and strong balance sheet include TVS Motor Company, Exide Industries, Punjab National Bank, Amara Raja Batteries, Cummins India, Crompton Greaves, Gujarat State Petronet and Glenmark Pharma.
In terms of sectors, Goldman Sachs upgrades PSU banks, industrials, and autos to overweight. “We downgrade tech, metals, and NBFCs to underweight. Thematically, we prefer domestic cyclicals over defensives and exporters,” it said in the report.
Both the global investment banks are of the view that earnings have bottomed out and India Inc. could possibly head for double-digit growth in the next 12 months or FY20.
Goldman Sachs expects earnings to grow 16 percent this year, highest in the region, and 18x target P/E with Nifty50 to reach 12,500 in the next 12 months.
BNP Paribas is of the view that earnings growth estimate of 14-16% in 2019-2020E, which is slightly higher-than-expected nominal GDP growth in these years, is more credible, and growth estimates in financials, consumer discretionary and healthcare appear too high.
“That said, a couple of macro influencers of earnings are clearly on the mend. The long-awaited private capex cycle appears set to commence, especially after the general election outcome, when political uncertainty should no longer hold back companies from finalizing their investment decisions,” it added.
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