Expect No Gains for India’s Nifty Over the Next Year, Citi Says

(Bloomberg) -- India's major stocks are unlikely to gain much over the next year as the inflow of funds amid global coronavirus-related stimulus and easy money policies has made them too expensive for now, according to Citigroup Inc.

“Foreign flows are supportive but on the domestic side, we have seen things slowing down a bit,” Surendra Goyal, Citi's head of India research, said in an interview this week. “Liquidity does act as a support to the market but valuations are on the higher side, particularly in the backdrop of the pandemic.”

The brokerage has a September 2021 target of 11,000 for the NSE Nifty 50 Index, about 2% lower than Wednesday's close. The gauge has surged 48% from its March low in one of the world's best equity rebounds this year. That's made shares pricey, with the Nifty trading at an all-time high of over 20 times estimated 12-month earnings.

The rebound has been helped by foreign investors, who have bought a net $4 billion worth of Indian stocks this year despite the nation's record economic contraction in the latest quarter.

Barring any big negative shocks, Citi expects India's economy to “normalize” in the January-March quarter as the country gradually emerges from strict lockdown measures. While macro data in August showed signs of stabilization, Goyal cautioned that the outlook is uncertain while local infection rates remain high.

Consumer staples are the broker's biggest underweight equity position among industries, on high valuations and the impact of reduced consumption. Goyal is positive on banks and other financials, the worst-performing sectors in India this year.

“We are in a situation where there will be an impact on the income and risks of lower spending,” Goyal said. “Low volume growth for consumer goods can persist for a while and hence it isn't easy to justify the very high valuations that some companies command.”

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