As we move towards the new year 2023, global brokerage house Goldman Sachs, in its outlook for India, said that it sees the benchmark Nifty50 hitting 20,500 by December 2023, implying a modest upside of 12 percent from current levels. The brokerage also noted that India is unlikely to outperform its peers in 2023 due to expensive valuations.
“We expect Nifty to reach 20,500 by end-2023, implying 12 percent price return, led by mid-teen earnings growth and a modest P/E compression (as light foreign positioning and geopolitical factors could support India’s multiples). Returns are likely to be backloaded, as growth recovers in 2H and equity flows pick up," said the brokerage.
As per the brokerage, India’s superior earnings growth appears to be priced in and a modest contraction in price-to-earnings multiples is expected going ahead.
Global peers
The brokerage further believes that India remains an attractive long-term destination for foreign portfolio investors (FPIs), however, it added the Indian equity markets are less likely to outperform its peers in the year 2023 as the valuations look expensive, leaving little room for upside.
The Indian market has been a strong outperformer thanks to 'stronger domestic fundamentals' but valuations have turned expensive compared to global peers, it pointed out. India has outperformed China for two years in a row and could underperform going ahead, it added.
The brokerage stated that amid a challenging global macro environment, Indian equities have significantly outperformed the MSCI Asia ex-Japan region by 18 percent year-to-date, and more than 40 percent in USD terms since last year, due to stronger domestic fundamentals.
“As 2023 unfolds, we think Indian equities are less likely to outperform for the third successive year as China and other globally cyclical North Asian markets (notably Korea) could perform better on China reopening catalysts and global recovery expectations in 2024,” GS said.
GDP
Goldman Sachs also slashed India's GDP forecast for FY23 to 5.9 percent from 6.9 percent. The Indian economy which claimed the title of the fastest-growing major economy title in the previous fiscal is likely to lose its momentum in 2023 owing to higher borrowing costs and fading benefits from the Covid pandemic reopening, said Goldman Sachs in the note. India's GDP grew 8.7 percent in 2021-22.
“Growth will likely be a tale of two halves, with a slower first half as the reopening boost fades, and monetary tightening weighs on domestic demand. In the second half, growth is likely to re-accelerate as global growth recovers, drag from net exports diminishes, and investment cycle picks up,” it explained.
Inflation
Goldman Sachs expects India's headline retail inflation to ease to 6.1 percent next year from an estimated 6.8 percent this year. Inflation has remained above the Reserve Bank of India’s tolerance band of 6 percent for the last ten months and is likely to hover over that mark in the coming few months.
Upside risks to inflation mean the Reserve Bank of India will likely raise the benchmark interest rate by 50 basis points in December and another 35 basis points in February, to hit a terminal rate of 6.75 percent, it added.
Growth estimates
GS expects corporate profits in India to grow 15 percent in 2023 and 2024, almost twice compared to the 8 percent CAGR for the region. However, this superior earnings growth outlook appears priced in, as the market trades at 22 times forward P/E, 30 percent above the long-term average and at an elevated P/E premium of about 80 percent versus the region, it noted.
Sector preferences
The brokerage said that it is overweight on banks, insurers, and investment cyclicals (industrials, cement), funded by Infotech, NBFCs, durables and utilities.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
