Foreign brokerages temper return expectation from Indian equities

The sudden rise in Covid cases and the micro-lockdowns imposed across key economic hubs in India has seen foreign brokerages trim their return expectation from Indian equities over the next 12 months.

After Nomura that recently cut its March 2022 Nifty50 target to 15,340 (earlier target: 14,680 by December 2021), analysts at Goldman Sachs, too, have tempered their expectation, albeit modestly. They now see the Nifty at 16,300 levels in 12 months (16,500 earlier). However, they have retained their ‘overweight’ stance on India for now.

With the new Covid-19 cases in India surging to a record high and a host of states announcing stricter lockdown restrictions, investors, Goldman Sachs said, are concerned about the risks to macro and earnings recovery. Despite the near-term headwinds, they expect the recovery to resume from Q3 onwards as restrictions normalise, vaccination pace accelerates and the global growth backdrop remains supportive.

“We adjust our MSCI India CY21 EPS estimate lower by 2 per cent and now expect earnings to grow 24 per cent this year (from 27 per cent earlier). Thematically, we favor targeted cyclical exposure via global, commodity and industrial cyclicals but avoid consumer and service cyclicals in the near term. Remain overweight Infotech, materials, and private banks and upgrade industrials,” wrote analysts at Goldman Sachs led by Timothy Moe, their co-head of Asia macro research and chief Asia-Pacific equity strategist.


In the global markets context, those at HSBC, say the substantial US stimulus is likely to create an ‘overheating’ threat to emerging markets (EM) equities. The only silver lining for EMs, they feel, is a dip in bond yields that can trigger an upside going ahead. HSBC has maintained an ‘underweight’ rating on India, Taiwan and Pakistan in its portfolio. Hong Kong, Singapore, Thailand and Indonesia are where they remain ‘overweight’.

“The big, easy buy story in Asia looks over; we’re now in for a tough grind as a lot of high growth narratives get repriced. We increased our cyclical exposure in European sector weightings as the outlook for economic recovery improves,” wrote analysts at HSBC led by Dr. Murat Ulgen, their global head of emerging markets research in an April 15 note.

Pent-up demand losing steam

As regards India, HSBC believes that the pent-up demand built on account of the stringent lockdown put in place for a few months in 2020 has lost steam. That apart, rapidly rising Covid cases pose a challenge to the overall economic growth.

“With gross value added (GVA) likely to be weaker (trending at +0.7 per cent y-o-y, based on monthly data releases so far), GDP growth for the quarter ending March could come in even more negative (trending at -2.3 per cent y-o-y currently versus +0.4 per cent in the previous quarter). Furthermore, the q-o-q sequential momentum in the quarter ending June will likely come in negative. Led by favourable base effects, the y-o-y growth number will be a large positive (over 20 per cent y-o-y versus –24.4 per cent in the June quarter last year),” wrote Pranjul Bhandari, chief economist for India at HSBC in an April 14 coauthored note with Aayushi Chaudhary.

While HSBC has retained its GDP forecast of 11.2 per cent y-o-y for fiscal 2021-22 (FY22), Goldman Sachs has cut India’s 2021 (CY21) real gross domestic product (GDP) growth projection to 10.5 per cent (10.9 per cent earlier).


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