Mumbai: Goldman Sachs revised its target for the Nifty at the end of 2014 to 6,900, from 5,700 in September, citing the likelihood of the Bharatiya Janata Party’s Narendra Modi becoming the country’s prime minister. In a telephonic interview from Hong Kong on Thursday, Timothy Moe, chief Asia Pacific regional equity strategist at Goldman Sachs, and one of the authors of the report, explained what prompted the re-rating. Edited excerpts:
How long did you take to write this report and who did you meet for it?
We spent three days in Delhi and Mumbai. We had around 20-22 meetings. We worked closely with our colleagues on the ground. Essentially we spoke to people in the political spectrum, and we also had a couple of corporate visits and met our domestic clients in India.
What really triggered your change of view—after two previous downgrades?
It was a combination of factors.
We are making it very very clear here that we are not expressing any preference for any parties or the candidate; nor are we expressing our view on the ultimate outcome of the general election.
All we are saying is that the market has been focused on this as an issue (optimism over political change likely to be led by Modi) and has been taking the recent polls in a positive way.
Again, I want to be clear that we are not making any judgement on politics. It is not our job to have an opinion on that. All we are saying is that—it is a fact that the market is responding to and this combines with the underlying fundamental significant issues such as stabilization of the external environment and some glimmers of hope in terms of the economic momentum, and some hope of moderate improvement in the corporate profit cycle.
You put all those things together—it explains why we have this sort of a recovery in the stock market cycle.
History tells us that opinion polls and popular voices have gone wrong in predicting election results. What if we do not have Modi at the centre, or if we don't have a stable government?
In politics, a week is a long time, and six months are eternity. A lot can change between now and the general election and who knows. The market can change its view in different ways and trying to forecast now is tough and is not possible.
We do think that the forecast that we have put up for 12 months from now is not just a pie in the sky, starry-eyed, or super-bullish expectation. It is basically about 9% upside from here.
We just felt that we were appropriately cautious earlier in the year and given the change that we have seen, it is also appropriate now to moderate that view and take a more balanced view.
Has this report attracted in any criticism or feedback from India’s government or finance ministry?
I am not aware of any adverse reaction.
Your last two views for India went off the mark. Any lessons learnt from them?
You get some things right, and you get some things wrong. We actually got our negative view very right. We downgraded our view, and we caught all the downturn in August. Where we erred is in underestimating the speed at which the market could bounce back.
Do you think your report was a little too premature, considering that the elections are six months from now?
We want to go from having an active cautious view on India to a balanced market weight view. We are not overweight on India, in terms of allocation. I would describe our view as somewhat in the middle—neither bearish, nor too bullish. We want to have a measured view on India, instead of an actively cautious one.
It is expected that the US Federal Reserve may start scaling down its bond-buying programme. This could be a big risk considering Indian equity market’s huge dependence on foreign fund inflows.
Of course the Fed tapering is a risk not just for India but elsewhere as well. However, the magnitude of response to that risk is going to significantly depend on what has changed since the middle of this year and when the Fed tapering takes place. Let us assume March, for argument’s sake, when the tapering might take place. In India’s case, it has made some commendable progress. The Reserve Bank of India deserves credit for the swift and decisive actions taken, which has clearly mitigated the external vulnerability risks.
Our sense is that, of course, there is a risk that the market gets worried when the Fed decides to taper but the magnitude of response is going to be much less now than it was in last August.
Is it a bull run in India? Where does India feature in terms of your preferences in the region?
We are striking a measured tone, as opposed to a very bullish tone. I wouldn’t say we are excessively bullish. India ranks roughly in the middle zone among Asia-Pacific markets... We are market weight on India.