The recent rally in markets has pushed global investment bank Goldman Sachs to change its bearish outlook on Indian equities.
Goldman, in a note on Tuesday, upgraded its rating on Indian equities to marketweight from underweight. Goldman Sachs also raised its CY14-end target for Nifty to 6,900. In September, the US-based multinational held its 12-month target for the 50-share Nifty at 5,700.
Goldman is the third major foreign brokerage to upgrade its stance on the Indian market. Last week, Japanese brokerage house Nomura upgraded its Sensex target for FY14 to 22,000 from 20,000, while Deutsche Bank also recently raised its CY13 Sensex target to 22,000 from 21,000.
In a report titled Modi-fying our view, analysts at Goldman Sachs said the possibility of change at Centre in the form of a Narendra Modi-led government, early signs of a cyclical pick-up and stabilising earnings outlook have led to the change in their outlook.
External capital account pressures have moderated, at least for now. The earnings outlook is stabilising and we have raised our CY14 EPS growth forecast from 8% to 11%. Midrange valuations are not a constraint if fundamentals continue to stabilise; mid caps trade at a 30% discount to the broad market. Retail redemption pressure could moderate, which could improve the equity demand-supply balance, the investment bank added.
The foreign brokerage also feels that with state elections and general elections around the corner, the expectation of a BJP-led government has gained more importance than the macro challenges. Equity investors tend to view the BJP as business-friendly, and the BJPs prime ministerial candidate Narendra Modi as an agent of change. Current polls show Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year, Goldman Sachs added.
The upgrade in views comes close on the heels of the Federal Open Market Committee (FOMC) deciding to continue with its $85-billion bond-buying programme. In light of this, foreign institutional investors (FIIs) are expected to continue pumping money into the Indian equities. In the current calendar year, FIIs have put in over $16 billion in Indian equities.
Last week, Prabhat Awasthi, MD & head of equity research along with other analysts at Nomura said that the delay in Feds taper plans, significant positive surprises in trade data and the possibility of positive surprises on the political front have reignited bullish sentiment.