Just last month, Indian stocks were struck by their worst run of losses in nearly eight years as election uncertainty, rising oil prices, and tensions over Kashmir spurred nervousness.
Fast forward to now, and the S&P BSE Sensex Index is up 7% taking it from one of the worst performers in Asia to one of the best in just weeks as the market has regained almost $220 billion since the February low.
Goldman Sachs (NYSE: GS) says that gains in Indian stocks will accelerate in the lead-up to next month’s election, and the investment firm raised Indian equities to overweight from marketweight last week, projecting that the Nifty 50 index will reach 12,500 over the next 12 months—nearly 8% higher from current levels—while earnings growth will climb to 16%.
Foreign inflows have increased “as market expectations for a potentially stable government have risen in recent weeks,” wrote the Goldman analysts led by Sunil Koul. The team wrote that investors can buy “short-dated Nifty calls, value cyclicals and oversold quality mid-caps to participate in the current rally,” and they favor banks and domestic cyclicals over exporters and defensives.
Timothy Moe, chief Asia Pacific equity strategist at Goldman Sachs, said on CNBC on Wednesday that, aside from the election, there are other factors behind the bank’s call for Indian stocks to continue to climb.
According to Moe, macroeconomic conditions have improved in India and earnings of listed companies have been better than their regional peers.
“You put all that together, and then you add in the potential for the improvement in sentiment into the election, and it says to us that the risk-reward is pretty decent over here,” Moe said.
The Goldman report set ‘Buy’ ratings for financial stocks ICICI Bank (NYSE: IBN) and State Bank of India. While for the industrial sector, the bank recommends construction engineering firm Larsen & Toubro, and Adani Ports and Special Economic Zone, as wells carmaker Ashok Leyland.
JPMorgan’s (NYSE: JPM) James Sullivan is also bullish on India and is optimistic on the country’s overall growth. Sullivan said that markets are projecting India’s earnings growth to come in around 20%, while JPMorgan is expecting it to be a bit lower at around 15%.
“That’s really the best growth story we’ve got among global emerging markets,” Sullivan said.
The country’s general election—which is scheduled to start on April 11 with results announced on May 23—will be a critical factor, though Sullivan said that Indian markets have performed strongly even amid previous “volatile” elections.
According to Goldman’s Moe, investor sentiment has historically improved over the last six elections cycles before the vote and then subsided within three to four months after the election.
Moe also said that there could be multiple reasons behind the pre-election rally in India, and noted the current supportive fiscal policies as well as optimism around a possible decline in political uncertainties.
“The point is that whatever causal factors you want to prescribe to it, the empirical reality is that the market historically has done pretty well in the lead-up to elections,” Moe said.