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Goldman Sachs Remains Overweight India

As the long-term positive macro story is still largely intact, Goldman Sachs remain overweight India in a regional context with a NIFTY 12-month target pegged at 9700.

Sunil Koul and team at Goldman Sachs in their June 12, 2015 “India Weekly Kickstart” report points out that India’s valuations have dropped meaningfully in past few months.

Potential impact of MSCI A-share inclusion over India

The Goldman Sachs analysts note Indian equities continue to witness FII selling with $300 million of outflows last week. However, YTD FII inflows stood at $6.7 billion in equities and $5.6 billion in bonds.

The analysts recall MSCI’s announcement last week that China A shares will not be included in MSCI EM as part of its 2015 review. The analysts anticipate China to account of 1/3rd of EM and APJ benchmark in 2 years assuming an initial A-share inclusion factor (IF) of 10%. They note India’s weight would proportionally decrease in the benchmarks:

However, Koul et al. point out that their long-term positive macro story over India is still largely intact, though the near-term progress has been slower than anticipated. The analysts say their long-term positive view on Indian equities remains firmly intact and are overweight India in a regional context with a NIFTY 12-month target of 9700.

Tracking NIFTY’s recent performance, the GS team points out that weakness in equities continued as NIFTY closed 1.6% lower last week, below the key level of 8000. They note with NIFTY down 11% from ytd highs, valuations have come off meaningfully to 16.5x NTM P/E and 3.0x LTM P/B:

India remains the strongest OW in EM funds

Koul et al. note growth and rates are the topical macro issues for Asia. Considering their view of a potential growth pick up, the analysts are taking a more pro-cyclical stance. Of note, they have upgraded Korea, while downgrading Indonesia and Thailand:

They also note India remains the strongest OW in EM funds, while funds are UW North Asia including China, based on EPFR data.

However, the Goldman Sachs analysts point out that AeJ and EM funds continue to trim their OW allocations in India.

Despite their pruning allocations recently, they also note FIIs currently own a sizeable $320 billion of Indian equities as of May 15, 2015:

Taking a closer look at FX, commodity and volatility, Koul and colleagues note Brent crude rose 2% wow and closed near $65/bbl, while gold rose 1% with INR weakened 0.5% Vs US$: