US brokerage firm Goldman Sachs on Thursday upgraded its investment view on Indian equities to 'overweight' from 'market-weight', citing improving domestic economic data, stable government and strong foreign institutional inflows (FIIs).
Goldman Sachs said it expects further market gains driven by earnings recovery and expects Nifty to reach 14100 by end 2021 which implies 15% upside from current levels.
Goldman Sachs added that it expects corporate profits to rebound 27% next year and a further 21% in 2022, after an expected decline of 11% YoY this year, as the economy recovers from the pandemic-induced contraction.
The global brokerage had lowered India's rating to market weight last year due to concerns of a nationwide shutdown, rising pandemic cases and macro/earnings risks, rich valuations, political risks. Besides India, the brokerage firm is also overweight on China and Korea.
"We are structural bulls on India but had lowered India to market weight in April amid nationwide shutdown, rising pandemic cases and expectations of a significant contraction in domestic activity in the absence of fiscal space," it said.
"We think the investment case for India has improved now and upgrade it back to overweight for the following reasons: First, India has been a laggard this year underperforming the region by 11pp in USD terms," it said in a note on 11 November.
The brokerage firm said that Indian equities are most positively sensitive to the improving prospects of a vaccine, and so it expects a 'catch up' laggard rally given the positive newsflow on the vaccine front (which could spur faster than expected recovery).
"More importantly, on the fundamental side, the domestic macro recovery is underway as suggested by pick up in high-frequency activity data points. Consequently, our economists expect growth momentum to continue with real GDP growth rebounding strongly to 10% and 7.2% YoY over the next two years (vs. expected -9% this calendar year)," the brokerage said in its recent report.
Sectorally, the US brokerage house expects cyclical sectors to perform better as the economic recovery continues to gather pace.
It added," In terms of fresh changes, we upgrade autos to overweight given continued strength in EV and the premium market in China and expectations of better stock performance from the lagging automakers in Korea and India (driven by a recovery in global/domestic demand)."
"The key risks to our upbeat view include growth (vaccine delays, pandemic resurgence); interest rates (inflation/bond yield spike that pressures valuations); geopolitics (US/China tension); and d) market-specific (tech sector concentration)," it added later.
The global brokerage house said," The exceptionally rapid recovery from the pandemic-driven 1Q selloff indicates that markets have looked beyond near-term earnings weakness and are discounting a robust recovery in 2021 and beyond. The tension between an expected sharp cyclical upturn and elevated valuations will be a key theme for the year ahead."