Foreign investors have sold equities worth over Rs 1 lakh crore since the beginning of October. Due to this, India's benchmark indices have climbed down from the new heights touched in September this year. Slow corporate earnings and high interest rates have dampened the mood of stock markets recently.
Global investment banking firm Goldman Sachs believes that the Indian markets will remain range bound for the next few months. In an email interview with Outlook Business, Sunil Koul, Global Emerging Markets and India Equity Strategist at Goldman Sachs, discusses corporate earnings, impact of Trump presidency and behaviour of foreign investors, among others subjects.
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What's your outlook on the trajectory of the Indian markets given attractive valuations of some other global markets right now?
While the structural positive case for India over the medium-term remains intact, we remain tactically neutral on India given slowing growth, high starting valuations, and a less supportive domestic and external environment in the near-term. We expect the market to remain range-bound over the next 3-6 months, but growth in the second half of 2025 should be better, fueling our 12-month NIFTY target of 27,000.
Also Read | How Retail Investors Fueled a Strong Bull Run at Indian Stock Markets
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Despite a robust growth story, why have foreign investors been so cautious about Indian equities?
High valuation has been the most common investor concern that has kept foreign investor allocations low in India. Another likely reason is that foreign investors have not been able to participate in many of the thematic opportunities and the associated strong price moves over the past few years in small and midcaps, due to lack of enough liquidity.
How do you see the effect of Trump election for an emerging market like India's?
Post the US elections, the macro environment has indeed become more challenging for Emerging Market (EM) equities and fund flows. We expect headwinds from a stronger dollar, high US long-term rates, shallower EM easing cycles and likely higher US tariffs on China in 2025. We think Indian equities should be relatively insulated from these macro headwinds compared to many of its EM peers.
What's your outlook on corporate earnings and have the performances so far made you rethink about projections?
Growth has been cyclically slowing and impacting profits, which led us to lower our view on India equities to marketweight about a month back in October. Our economists expect India’s GDP growth to decelerate to 6.3 per cent yoy, on continued fiscal drag and slower credit growth, which should continue to weigh on consensus EPS expectations. We forecast MSCI India earnings growth of 13 per cent in CY 2025, 3 percentange points below consensus estimate of 16 per cent EPS growth.
With RBI's interest rate holding higher than longer compared to global peers, would this phase act a significant drag on the markets and corporate sector?
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We have pushed back our forecast for the start of rate easing by the RBI to Q1 calendar year 25 but continue to expect only 50bp cumulative cuts by mid-year. While the cyclical growth slowdown calls for easier monetary conditions, the stronger dollar scenario will mean the RBI will likely proceed cautiously. Given macro-prudential tightness, retail loan growth may remain tepid even in the face of lower rates.
Along with the bull run we saw in the equities market, the volumes in the derivatives market rose significantly. With regulators cracking down on the segment and volumes expected to be down, how do you think this development will play out for the markets?
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While the effective implementation of the recently announced SEBI’s measures aimed to regulate the activity in the index derivatives market are positive for the medium-term market stability and increased investor protection, we think they could impact retail activity, volumes, and sentiment, thereby causing potential near-term volatility in the market.
In the near to medium term, what themes are you keeping an eye on in the markets which can have opportunities for investors?
Quality factors have outperformed in past periods of growth slowdown. We think investor focus is likely to therefore lean towards quality companies with strong earnings visibility in the near-term. This includes companies with strong balance sheets, high ROEs, high earnings visibility, and positive EPS revisions. Over the medium-term, our preferred alpha themes include housing, agriculture, defence, affluent consumption, and tourism.
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