Markets

Defensive Goldman Sachs or bullish Morgan Stanley?

KS Badri Narayanan Chennai | Updated on September 21, 2018 Published on September 21, 2018

Two diametrically opposite reports from premier financial institutions on the Indian market have left many retail investors perplexed. While one changed its bullish stance (since 2014) to neutral, the other has maintained its optimism on Indian markets.

Yes, we are talking about Goldman Sachs (GS) and Morgan Stanley (MS).

A September 16 Goldman Sachs’ report, authored by eight analysts, said: “While earnings have improved, Indian equities have almost doubled over the past five years and outperformed the region by 60 pp (percentage points) in dollar terms. Given elevated valuations and recent strong performance, we believe the risk-reward for Indian equities is less favourable at current levels and we lower our investment view from overweight to market weight.” Goldman Sachs has been strategically overweight on India since March 2014 on expectation of pro-growth government policies and structural reforms to drive a pick-up in growth and a recovery in corporate profits.

“We expect markets to consolidate heading into the elections and the Nifty to reach our 12-month target of 12,000 as political uncertainty wanes and earnings accrue,” GS added.

On the other hand, Morgan Stanley’s Sheethal Rathi & Ridham Desai in their September 12 report, argued that Indian equities continue to be in an uptrend mode backed by broad-based earnings growth acceleration. “Therefore, we believe, rotation is inevitable and investors should not chase outperformers but rather invest in their favourite underperformers among large-caps, as well as small- and mid-caps (SMID),” the report said

Morgan Stanley upped the BSE S&P Sensex target to 42,000 for September 2019, as it thinks the market is set up for a macro trade (rising correlations of returns across stocks).

“We are also adding underperforming stocks to our portfolio — namely SBIN, Apollo Hospitals and Prestige Estates,” Morgan Stanley said.

GS cited five reasons — stretched valuation, macro headwinds (higher oil prices in rupee terms), tighter financial conditions and weak recent activity data (CAD). It also said that earnings ‘catch up’ is priced in, profit recovery is underway, but micro ‘catch up’ doesn’t warrant further market upside, domestic institutional flows have slowed and event risk (a likely increase in fiscal deficit before elections and risk of a less stable government) could weigh on markets in the near term.

According to Morgan Stanley, the key risk between now and June 2019 is that the market turns pessimistic on the General Election outcome scheduled in May 2019. Thus, if investors start believing that the electorate will deliver a fragmented verdict, the index could head towards its bear case (32,000), especially if such a belief is combined with deteriorating global equity markets. In the bull case scenario (sees a 30 per cent possibility), it expects the Sensex to climb to 47,000.

So, should these prognosis confuse you? Whose advise should you follow? Given Friday’s carnage in the market, one may be tempted to believe GS may be right. However, don’t bet big on these views. They will keep changing based on emerging situations as these institutions are answerable more to their own investors than the public at large. They may change their investment strategies according to their investors’ needs in the dynamic investment world.

Besides, if you are a long-term investor, you need not worry about such noise in the market.

Published on September 21, 2018

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