(Bloomberg) — Analysts are becoming increasingly divided over the prospects for India’s stock market after an 11-month winning streak.
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While Goldman Sachs Group Inc. has tactically downgraded Indian equities from overweight to neutral on slowing economic growth, UBS Global Wealth Management said it is time to “buy the dip” as the weak spell in the country’s growth and profits appears to be transitory.
The difference in consensus underlines growing uncertainty about the sustainability of corporate profits in India, against the backdrop of weakening consumer spending and high valuations. Some investors expect a slower upward movement in the markets, while others see a decline in India’s relative attractiveness as China’s efforts to pull its economy out of the doldrums draw global funds back.
“While we believe the structural positive case for India remains intact, economic growth is slowing cyclically in many sectors,” Goldman strategists including Sunil Koul wrote in a note on Tuesday. Deteriorating earnings sentiment, high valuations and a less supportive environment could limit upside potential for local stocks in the near term, they added.
The market may correct in the next three to six months, although a major decline is less likely due to support from domestic flows, they say. Goldman cut its 12-month target for the NSE Nifty 50 Index to 27,000 from 27,500 earlier, implying a 10% upside from Tuesday’s close.
Goldman joins a growing group of brokers casting doubt on India’s stock market rally. Earlier this month, Bernstein Societe Generale Group downgraded local stocks to underweight, citing expectations for continued outflows and weak earnings, while predicting further upside potential for Chinese stocks thanks to policy stimulus.
While the South Asian country’s record profits are already showing signs of fatigue, the slowdown for the bulls is due to one-off factors and economic growth is expected to resume.
Investors should continue to increase “fundamental or strategic asset allocation to the market” as India remains the fastest growing economy in the G-20 group, said Tan Min Lan, head of UBS’s Chief Investment Office in the Asia-Pacific region, in a Bloomberg TV interview.
The asset allocation for India is still “minuscule” for many institutional investors, she added, leaving more room to expand their positions.
