Goldman backs China growth story, slams India

Brokerage house Goldman Sachs remains negative on India, and says it
prefers to invest in Chinese equities as the latter are available at
cheaper valuations. In addition, Goldman Sachs is of the view that
China has less severe cyclical macro challenges and greater policy
flexibility to address them.

In a report, the brokerage says that valuations of Indian equities at
14.4 times forward earnings and at 3.2 times price to book value is
among the highest in the region. “This will likely limit the extent to
which the market can continue to move up, especially if consensus
earnings estimates come down,” the report says. The corresponding
ratios for Chinese equities are 11.1 times and 2.2 times,
respectively.

Secondly, Goldman expects oil prices to rebound during the fourth
quarter, something that would undermine the macro-economic
fundamentals of an oil importing economy like India’s. High inflation,
tight monetary policy, and current account and fiscal deficits
continue to remain a cause of concern for India, Goldman says.
According to the report, the deceleration in economic growth from 9.0
per cent in fiscal 2008 to 7.2 per cent or possibly less in fiscal
2010 suggests that consensus earnings forecasts could come down
further. “Inflation is high (12.63 per cent WPI); the fiscal deficit
is 9-10 per cent of GDP (on a gross-gross basis,depending on oil); and
the current account deficit is widening to 2.4-4.5 per cent of GDP
(depending on average oil prices) from 1.5 per cent of GDP last year,”
the report says.

Regionally, China is a better bet than India, according to Goldman.
“India’s recent strong outperformance results in its trading at a
roughly 30 per cent valuation premium to HK-listed China stocks for
comparable consensus earnings growth. Factors that could offer
potential support to Indian market, asserts Goldman, include flat or
lower oil prices, confirmation of a good monsoon, and investor
positioning (high domestic mutual fund cash levels, foreign
underweight positions). Conversely strengthening in oil prices, signs
of slower investment or margin pressure as a result of higher interest
rates and poor monsoon can adversely affect India.

The outcome of the monsoons, says the report, would be a key swing
factor, as 60 per cent of the labour force is engaged in the
agricultural sector. Consequently this would have a profound effect on
industry and services. In terms of investor positioning, domestic
mutual fund cash levels are 11 per cent, which is high in absolute and
relative terms, says Goldman. “But foreign investors have net sold
$11.3 bn since October 2007, erasing all net inflow since January
2007.”

Goldman notes that if market continues to focus on slower global
growth (as opposed to low growth and high inflation), Indian equities
could remain well supported.