In a report that echoes concerns about the Indian equities market, Goldman Sachs has advised a cautious approach due to ongoing global challenges and elevated stock valuations. Additionally, the upcoming national elections in India add another layer of caution for investors. Despite this year’s market surge, overseas investors have been selling Indian stocks, and the need for prudence is becoming increasingly apparent.
The Nifty 50 Index, a key benchmark for Indian stocks, is currently trading at historically high valuations, while the performance of midcap stocks has reached stretched levels. Goldman Sachs Group Inc. has therefore recommended a tactically conservative stance toward Indian equities in the short term. They cite global headwinds and expensive valuations as factors contributing to this approach, especially as India prepares for next year’s national elections.
Goldman Sachs analysts, including Sunil Koul and Amorita Goel, expressed their viewpoint in a recent note, stating, “The sharp rally since end-March, expensive valuations and global macro risks (high oil, high US rates, strong dollar) warrant a tactically conservative stance over the next three to six months.” While the ongoing bull run in the equity markets might seem favorable for Prime Minister Narendra Modi, who seeks a third term in office, a growing sense of caution has emerged.
This caution is highlighted by the fact that overseas investors sold a net total of $2.3 billion worth of Indian stocks in September, marking a reversal after six consecutive months of inflows. The impending elections are likely to influence economic policies and reforms, especially as India, the world’s fastest-growing major economy, is increasingly viewed as a viable alternative to China.
Goldman Sachs initially adopted a market-weight stance on India in early July, a position that has seen little change in the Nifty 50 Index since then. As of the most recent data, the index saw a rise of up to 0.6% on Thursday. The NSE Nifty 50 Index in India has climbed over 15% from its March low, and it is currently trading at a multiple of 18.2 times its one-year forward earnings, making it the most expensive national benchmark among major Asian markets, according to Bloomberg data. During the same period, the Nifty Midcap 100 Index has surged by 37%.
While historical data shows that the Nifty 50 Index has rallied more than 10% in the six months leading up to election results in four out of the past seven instances since 1996, Goldman Sachs analysts believe that the current valuations and the performance of midcap stocks deviate from previous election cycles. However, they also point out that implied volatility in Indian equities remains low and does not appear to factor in any significant event risk related to the upcoming elections, as opinion polls suggest that Modi will retain power.
In response to the market conditions, Goldman Sachs analysts suggest that investors consider rotating towards large-cap stocks, particularly those associated with higher return ratios and those positioned for a consumption recovery. Additionally, they recommend hedging against potential risks by purchasing put options on the Nifty index. Some of these options are currently among the most affordable among major indexes globally, offering a strategic risk management approach for investors in the Indian equities market.
