Goldman Sachs joins Nomura to raise India’s equity rating

Investment bank Goldman Sachs on Tuesday became the latest global agency to push up India's credit rating on equities.

What the local media has dubbed the 'NaMo' (Narendra Modi) factor has played a part in the upgrade. Goldman, upgrading India's rating to marketweight from underweight, said the perception that Bharatiya Janata Party-led National Democratic Alliance "could prevail" in the 2014 elections – with Modi as Prime Minister – played its part.

It added that better corporate profitability and signs of an early pickup in cyclical sectors have also been taken into account.

Goldman Sachs also raised its CY14-end target for Nifty to 6,900. In September, the US-based multinational held its 12-month target for the 50-share Nifty at 5,700.

Goldman is the third major foreign brokerage to upgrade its stance on the Indian market. Last week, Japanese brokerage house Nomura upgraded its Sensex target for FY14 to 22,000 from 20,000, while Deutsche Bank also recently raised its CY13 Sensex target to 22,000 from 21,000.

In a report titled ''Modi-fying our view'', analysts at Goldman Sachs said the possibility of a Narendra Modi-led government at the centre and early signs of a cyclical pick-up and stabilising earnings outlook have led to the change in their outlook.

''External capital account pressures have moderated, at least for now. The earnings outlook is stabilising and we have raised our CY14 EPS growth forecast from 8 to 11 per cent.

''Midrange valuations are not a constraint if fundamentals continue to stabilise; mid caps trade at a 30 per cent discount to the broad market. Retail redemption pressure could moderate, which could improve the equity demand-supply balance,'' the investment bank said.

The brokerage firm feels that with state elections and general elections around the corner, the expectation of a BJP-led government has gained more importance than the macro challenges.

''Equity investors tend to view the BJP as business-friendly, and the BJP's prime ministerial candidate Narendra Modi as an agent of change. Current polls show Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year,'' Goldman Sachs said.

The upgrade in views comes close on the heels of the Federal Open Market Committee (FOMC) deciding to continue with its $85-billion bond-buying programme. In light of this, foreign institutional investors (FIIs) are expected to continue pumping money into the Indian equities. In the current calendar year, FIIs have put in over

Japanese brokerage firm Nomura has raised its Sensex target for 2013 to 22,000 from 20,000, saying the delay in the US Federal Reserve's plans to withdraw its stimulus programme, significant positive surprises in trade data, and the possibility of positive surprises on the political front have reignited the bullish fervour.

Both Goldman and Nomura have warned of risks to the stock market surge from an unexpected decline in corporate earnings, outflow of foreign money due to Fed tapering and slow growth.