Goldman Sachs, a Wall Street brokerage, has expressed concern about the rising COVID-19 caseload, which is breaking new records every day, as well as the increasing lockdowns, forcing it to lower India’s GDP growth forecast for the entire year to 10.5 per cent from 10.9 per cent, as well as lowering stock index valuations and earnings.
Goldman Sachs’ house economists, led by Sunil Koul, wrote in a thorough note on Tuesday that the record number of pandemic cases and a slew of critical states declaring tougher lockdowns in recent months have fueled serious growth concerns leaving investors concerned about the risks to macro and earnings recovery.
It lowered its prediction for 2021 real GDP growth to 10.5% from 10.9 per cent previously, but it remained above consensus. It also expects growth to be affected in the June quarter.
As a result, it has lowered its earnings growth outlook for 2021 to 24% from 27% previously. It expects the recovery to resume in July as restrictions ease, vaccination rates pick up, and the global growth environment remains favourable.
The confidence crisis was evident in the stock markets, which have been hammered, with the Nifty losing 3.5 per cent on Monday alone. The index has dropped 7% since its year-to-date peak.
The Goldman Sachs economists said they still expect all of these to have only a modest effect overall since the restrictions have been aimed at specific sectors with no significant spillovers so far, lowering the Q2 (June quarter) growth forecast without quantifying it.
In terms of valuation compression, they are now forecasting only low-teen returns this year and have factored in a 10% PE compression. Goldman Sachs expects the Nifty to hit 16,300 by December, down from 16,500 previously predicted, implying just a 14% increase in rupee terms.
Following a record high of over 1.68 lakh infections per day, significant states such as Maharashtra, Madhya Pradesh, Delhi, Tamil Nadu, and Bihar have imposed tighter lockdown limits, which are expected to be expanded in the coming weeks.
The brokerage predicted that the containment measures would be more focused, affecting particular services such as food and beverages, leisure and entertainment, and transportation, with minor spillovers into other industries such as construction and manufacturing.
Although these restrictions are expected to harm activity in the June quarter, activity is expected to rebound sharply in July as containment policies are normalised, according to the study.
Although near-term risks remain if restrictions and shutdowns expand, further downside risks can be controlled if market sensitivity to lockdowns decreases, according to the report. On the other hand, Goldman Sachs is overweight in India and prefers targeted cyclical exposure while remaining positive on domestic equities.