Near-term macro concerns notwithstanding, global investment banking behemoth Goldman Sachs has retained its overweight view on Indian equities. Believing rupee to be more vulnerable than equities, the bank highlighted that the recent concerns around the Union Budget, widening current account deficit and slowing FII flows tend to impact the rupee to a greater degree than the equity market.
The bank’s latest Portfolio Strategy Report said: “We retain our 3-month and 12-month overweight views on Indian equities despite near-term macro concerns which we expect may impact the rupee and Indian bond yields to a larger degree. Our view hinges upon two factors — a growth recovery on the horizon and a supportive equity valuations backdrop.”
Turning growth cycle
For the Nifty, the report has set a 12-month target of 7,000. “Recent CAI and PMI indicators suggest growth has troughed, suggesting the macro cycle is turning. From a relative perspective, India is the third least expensive market in Asia-Pacific ex-Japan based on 10-year historical P/E and P/B z-scores. In the near-term, an RBI cut on March 19 or firmer IP print may give confidence that the growth cycle is turning,” added the report.
The report also pointed to a break down in relationship between FII inflow and equity market.
It stated given the $25 billion of foreign institutional investors inflow last year, a number of equity investors had voiced concern that the inflows would grind to a halt in 2013, which would pose significant risk to the market. Nevertheless, FII flows have totalled a healthy $8.5 billion already in 2013, while the Nifty is down 3 per cent year-to-date.
In short, the relationship of FII inflow and the equity market has broken down completely. Currently, there is neither a strong relationship between FII nor DII flows with the Nifty. In other words, neither investor base appears to be ‘driving the market’, said the report.