The updated target suggests a potential upside of over 8% for the index compared to its current level. In Tuesday’s trading session, the Nifty50 was at 21,707, marking a nearly 1% increase from the previous close.
Also read: TCS Q3 Results Preview: Expect muted earnings growth; deal wins, outlook on near-term demand to be in focus
In the last two months, there has been a positive transformation in the global macroeconomic landscape. Anticipations include robust growth in the US, earlier-than-expected interest rate reductions in both the US and Asian regions, and a projected mild depreciation of the dollar throughout the year.
“While markets have partly priced this, a better growth/rate mix recently led us to raise our Nifty index target, incorporating a higher ‘target’ valuation multiple,” the brokerage firm said in its report.
Here are key driving factors –
Macro factors
following the initial Federal Reserve rate cut, although returns tend to diminish thereafter.
Despite this trend, the investment bank notes that India’s equity market is less responsive to US rates and Fed cuts compared to other cyclical Asian markets. Additionally, the relatively shallow rate-cutting cycle in India suggests a constrained impact on the domestic equity market.
Also read: Tata Motors shares hit 52-week high after JLR posts 27% yoy increase in sales
The investment bank highlights that some of the positive macroeconomic factors have already been factored into the Nifty50’s 15% surge from the lows observed in October 2023.
“Regarding rates, Goldman Sachs’ US economists now anticipate a swifter easing in the Fed funds rate, projecting five additional rate cuts in 2024, beginning in March, compared to the earlier expectation of only one cut in Q4 2024,” the report said.
The company’s economists have revised their projections for interest rate reductions in certain markets. They anticipate that the Reserve Bank of India will initiate rate cuts in the third quarter of the calendar year 2024, as opposed to their previous prediction of cuts commencing in the fourth quarter.
Goldman Sachs predicts that India’s GDP growth will maintain resilience at 6.2 percent in 2024. The external balances remain favorable, bolstered by a low current account deficit, strong inflows in public market capital, ample foreign exchange reserves, and minimal external debt, according to the report.
“Our economists recently revised India’s current account deficit forecast lower by 60 basis points to 1.3 percent of GDP in 2024 given downward revision to our commodity team’s oil price forecast to average $81/bbl in 2024 (from above $90/bbl earlier) and continued strength in services exports,” the report said.
Also read: 2024 top stock picks: IIFL lists Axis Bank, BPCL, Bajaj Finance, Nykaa among ‘buys’; TVS Motor in ‘sells’ – check list
Earnings growth
In addition to favorable macroeconomic conditions, the investment bank asserts that robust earnings growth will play a pivotal role in propelling market returns this year.
“With economic growth still resilient in India, we continue to expect strong mid-teen corporate profit growth in India,” Goldman Sachs said.
Following an anticipated 20% increase in earnings in 2023, the bank foresees a 15% growth in MSCI India profits in 2024, followed by another 14% in 2025. This growth is expected to be widespread across various sectors.
After a prolonged cycle of earnings per share (EPS) downgrades lasting a decade, the bank notes that earnings revisions have stabilized. Goldman Sachs anticipates a reversal in the earnings cycle, identifying it as a key driver for index returns in the forthcoming years.
Also read: Tiger Logistics announces stock split 1:10; shares hit 52-week high
Valuation
The current trading valuation of MSCI India stands at approximately 22 times its 1-year forward Price-to-Earnings (P/E) ratio, surpassing its historical average.
Goldman Sachs noted that India’s relative P/E premium, at around 76%, appears to be on the higher side compared to the previous five-year average of 50%, indicating an elevated valuation.
“While we expect valuations to moderate over the course of the year, as underlying earnings catch up, we believe the shifts in macro environment, notably sooner than expected Fed easing cycle and better global risk appetite warrants a higher ‘target’ multiple versus our previous expectations,” the bank said.
Also read: Easy Trip Planners stock spikes for 3rd consecutive day, gains over 5.5%; what’s behind the rally?
Anticipating a robust performance, it foresees a 15% increase in MSCI India profits in 2024, followed by an additional 14% surge in 2025. This growth is expected to be widespread across various sectors.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
More
Less
Published: 09 Jan 2024, 06:22 PM IST
Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
