Indian equities should be relatively insulated from the macro headwinds of a stronger dollar, shallower EM easing cycles and likely higher US tariffs on China. However, lofty valuations and weak earnings could limit the upside, said Goldman Sachs (GS), a foreign brokerage.

“Indian equity markets have a lower sensitivity to China/global growth and lower beta to the US dollar and rates, suggesting a lesser impact from external macro risks,” it said.

GS expects the market to remain range-bound over the next 3 months, with a Nifty 3-month target of 24000 (+2 per cent) and a back-loaded recovery to its 12-month target of 27,000, driven by underlying earnings growth.

Range-bound outlook

While India’s strong long-term structural growth story remains intact, growth has been cyclically slowing and impacting profits, which had led the brokerage to downgrade its view on India equities to market weight about a month back. It expects India’s GDP growth to decelerate to 6.3 per cent y-o-y, on continued fiscal drag and slower credit growth, which should continue to weigh on consensus earnings per share expectations.

With the recent 10 per cent correction in markets, MSCI India forward P/E valuations have de-rated 8 per cent from the end-September peak of 24.8x to 22.7x, but it still trades at 1.4 standard deviations above its 10-year history and a 70 per cent premium to the MXAPJ region (versus 55 per cent 5-year average).

Valuation concerns

“Our top-down P/E macro model suggests that current valuations are still above the ‘fair value’ estimate of 21x for the end of 2025, suggesting further de-rating risk amid slowing growth, weaker flows and lower global risk appetite. As we have previously noted, history suggests muted 3/6m returns for the market when starting valuations are high (greater than 20x P/E) and earnings are seeing downgrades,” GS observed.

Sectorally, it remains overweight on select domestic sectors with higher earnings visibility like autos, telcos, insurance, realty, and internet. It has upgraded exporters like Infotech to overweight and Pharma to market weight on stable/improving demand, EPS tailwinds from weaker rupee and defensive characteristics. Its preferred medium-term themes include housing, agriculture, defence, tourism and affluent India.

Earnings disappointment

The recently concluded Q2 season was disappointing. MSCI India Q2 profits grew 10 per cent y-o-y, 4 percentage points below consensus expectations at the start of the quarter, with misses outpacing beats. MSCI India CY24 earnings saw sharp cuts of 3 per cent over the past six weeks, erasing all the upgrades seen in the first three quarters of the year, according to GS.

More importantly, earnings sentiment for the broader BSE 200 index has worsened sharply over the past month and is at 2-year lows. Corporate guidance has also been soft, with managements from most domestic sectors acknowledging the ongoing slowdown in their earnings calls, GS said.

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