Indian market may trade sideways for 3-6 months but Nifty likely to hit fresh high of 20,500 in H2: Sunil Koul

"Expect strong fundamentals and strong earnings growth for the next two years. So, we do not think India will be a strong outperformer next year but in terms of the path we think the first half is likely to be weak but then you see a recovery in the second half of next year which will bring India to a fresh all-time highs of 20,500," says Sunil Koul, Executive Director (Asia Pacific Portfolio Strategy, Global Macro Research), Goldman Sachs

In your latest note you talked about India’s strong outperformance with strong fundamentals but at a premium price. What do you think is going to give up first – the outperformance or is the price going to course correct at some juncture?
The Indian equity markets have been outperforming for the last two years. We think that the fundamentals are still strong but the market may trade sideways in the next three to six months before moving higher because multiples may correct as India’s valuations are expensive relative to the rest of the region.

We are expecting strong fundamentals and strong earnings growth for the next two years. The markets could go higher over the next 12 months.

In the event that happens and If we course correct, valuations ease off a little bit and perhaps we go into a sideways movement in the next foreseeable future, given the kind of sectoral rotation that is currently playing out, what do you think is going to dominate the market mood both on the upside and downside sectorally?
I think it makes sense to be in the domestic cyclical sector of the economy, we have been overweight in that sector last year and this year, and that has broadly worked out. We were overweight banks and underweight IT, both of those sectors have generated decent alpha for the investors. Banks can continue to outperform the broader markets next year.

Strong earnings growth from the banks are expected with loan growth and stable to higher margins. NBFCs' profitability may come under pressure given the current tight liquidity environment and the rising cost of funds. I would advise to be long in banks and a bit cautious on the NBFCs sector.

The other big focus will be the broader manufacturing sector, the infrastructure, the cement, the E&C companies, the warehousing and the logistics sector. We think that the private capex cycle is coming back. The government has continued to focus on infrastructure with the Make in India and PLI schemes. I think banks, insurance and the broader manufacturing sector or industrials and cement should likely do well next year.

On the funding side it may be too early to get back into the IT sector. The estimates are still optimistic. The tech spending, although it has been resilient this year may soften a little bit next year and so the top line US dollar revenues will slow and there will be more earnings cuts.

So, we are underweight in the IT space and the broader consumer discretionary durable space because it is too expensive and there are signs of slowdown in urban consumption.

You have seen some of the other emerging markets underperform and you have the world’s biggest economy as well which has been under huge pressure. What is your outlook on the FII positioning for India in the coming months and years?
One of the big calls we are making from a regional perspective is that we are sticking to India at a market weight allocation because of performance and high valuations. But we think there are other north Asian markets such as China and Korea which could do better next year because of the reopening catalyst in China as well as the global economic recovery in the later half of next year which should help Korea.

So, from a country allocation perspective at least for three to six months we think India may trade sideways.

We do not think there could be a sharper correction in Indian equity markets and the valuations could hold on to its levels because of the positioning which has been pretty light. There has been about 20 billion foreign net selling this year already and the FII ownership in the top 200 stocks, the BSE 200 is already at eight to nine year lows. We track a lot of benchmark positions in terms of how emerging markets, Asia and global funds are doing.

The Asia and the emerging market allocations even though they are slightly overweight they are still below the historical peaks. Funds are around 100 basis points overweight India but India’s weight in the benchmarks has also increased. So, they are way less overweight than they had been in the past as the peak was around 500 basis points.

The global funds have been underexposed so there is a lot of demand that is coming in for India. There is a rising EM ex-China and Asia ex-China theme that is also playing out in terms of a lot of funds opening the ex-China mandate. So, we think the global flows can come back towards the second half of next year given how light the foreign positioning has been.

Given that you are expecting corporate profits to grow 15% in 2022-23 do you think that to a great extent this smart earnings growth is already priced in?
Yes, the mid-teen earnings growth would be expected in India. It is far superior than what we are expecting in many other parts of the region. So, for the regional aggregate as a whole we are looking at 7-8% earnings growth. Thus India is still likely to deliver almost 2X the earnings growth than the other markets.

In the near term some of this is already in the price even. If you look at the 24-month forward valuations which are at 19-20 times. Thus, it is expected to trade sideways for the three to six months but as corporate profits come back in the second half of next year, the market should end higher on a 12-month basis. We have a Nifty target of 20,500 and 11% upside from current levels. So, if you get a 15% earnings growth compound and then you lose a little bit 4-5% on the multiples that is how we get to our numbers.

So the Goldman Sachs Nifty target for the new year is 20,500 an upside of almost 11%. The question is, will India continue to be the best performing stock market on this planet, are you expecting the outperformance to continue?
In terms of our regional allocations China and Korea are likely to do better than India because of China reopening as well as Korea which is a much deeper cyclical market, there are signs that the semi-cycle there is turning so as you go into next year market may start to price that.

So, we do not think India will be a strong outperformer next year but in terms of the path we think the first half is likely to be weak but then you see a recovery in the second half of next year which will bring India to a fresh all-time highs of 20,500.

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