Goldman Sachs Downgrades Indian Stocks to 'Neutral' as Market Mojo Fades

Goldman Sachs has "tactically" downgraded Indian equities to 'neutral' from overweight as slowing economic growth coupled with muted corporate earnings takes a heavy toll on investor sentiment.

So far this month, BSE Sensex has witnessed a decline of 5.61 per cent or over 4,430 points. The NSE Nifty index followed a similar trajectory and dropped by more than 1,355 points.

The global brokerage house pointed out in its report that while India's long-term structural story remains intact, economic growth is cyclically slowing in several areas. Plus, muted corporate earnings sentiment is further adding to the subdued outlook. "Worsening earnings sentiment, an accelerating pace of earnings-per-share cuts and a weak start to the September-quarter results season indicate an impact on profits," the brokerage firm reportedly said.

This isn’t the first global brokerage house to take a more cautious stance on India’s stock market, which was once the favorite among emerging markets.

Earlier, Jefferies also dropped its rating from ‘hold’ to ‘underperform.’ Even Bernstein Research recently downgraded Indian stocks to 'underweight,' stating that the market looks "quite vulnerable" in the near future. These downgrades point to rising worries around India’s short-term growth outlook.

Valuation concerns and FII sell-off

Following China's recent stimulus to boost its struggling economy, Foreign Institutional Investors (FIIs) have been pouring their money into the Chinese stock market.

It's important to mention that China's cheaper stock valuations are a big reason why FIIs are flocking there, especially compared to India's 'overvalued' market. As of October 22, the Indian stock market's PE ratio stands at 26.14, way higher than China's single-digit PE, which stands at just 9.54.

While everything seems to be going in China's favor right now, analysts still believe that India has a positive long-term outlook.

"Tactically from a short term (3-6 months) perspective, China’s equities look attractive as the recent measures keep hope alive that policymakers are willing to act, and, as such, will help to create a floor to further moderation. From a long-term perspective, we do not see the measures announced to date changing the track of the economy unless it is backed by incremental fiscal stimulus that concretely addresses either consumer confidence or property market malaise," Elara Securities stated in a report earlier this month.