Goldman Sachs: Fed's guidance hawkish, action in-line with expectations

The US Fed has delivered a third consecutive 75 basis points (bps) rate hike, in line with the market expectations and consistent with recent Fed communications. While there were no major changes to the statement, the summary of economic projections (September) showed a sharp increase higher in the Federal funds rate.

“The 75 bps hike, which we saw was in line with our expectations. The guidance was a little bit much more hawkish,” said Sunil Koul, APAC Equity Strategist, Goldman Sachs.

He was looking at the Fed terminal rate of 4-4.75 percent range and the target rate was 50 bps higher.

“As a consequence of that we changed our rate forecast, we are now looking at a similar target fund rate at 4.50-4.75 percent."

For the market, this means that rates will go higher, more tightening coming through and the combination of slowing global growth, higher rates as well as the dollar, which still seems to be on an uptrend, means that risky assets will continue to have tough times.

India is one of the domestically demand-oriented markets, somewhat more defensive. However, valuations are a little bit more extreme, are on the higher side in terms of premium to the region and so markets are expected to consolidate for the next three-six months, Koul added.

This bigger theme of China's overall slowdown and China plus one, which benefits India should still be in place. Although in terms of equity markets, China may do slightly better heading into next year because of cheaper valuations and some policy easing but from India's standpoint, the slowdown in China and India benefiting in terms of supply chain theme is still pretty much in place.

Goldman Sachs downgraded the IT sector recently. The market is still optimistic in terms of the US dollar revenue growth, looking at double-digit growth.

“We think the toplines will slow down to mid-single digit 5.6 percent growth while the valuations are still on the elevated side for the sector as a whole."

The sector has underperformed but he believes, it will still underperform further.

“We are downgrading the top three stocks in the sector and we are underweight the sector as a whole generally means that we think the overall sector should continue to underperform the broader markets."

A lot of negative news has come out of China, especially around the property sector. So people are moving money into defensive and domestic markets like India. The investor community has gravitated towards south-Asia.

“The regional markets year-to-date, the market which has done the best, is Indonesia and India is at number two.”

It is true that India did see quite a bit of inflow in the month of August — $6-7 billion. The trends in September have already seen a little bit of slowdown in the flows.

“We have been seeing the outflows from the Emerging Markets (EMs) active funds for a while. YTD EM active funds have seen close to $20-25 billion of net outflows,” Koul added.

EM ETFs have been holding up the flows, he believes, while adding that India's outperformance is acting as a hedge to China, implying that flows into India via the passive route have been increasing.

However, there has been a slowdown in the ETF flows in the past three-four weeks. Therefore, Koul is less optimistic about the flows at least in the near term from the global side because of the slowdown that has been seen.

From a fundamental point, he thinks India is a very strong secular growth story.

Goldman Sachs, very recently, has looked at trended earnings growth potential in the markets over the next three-five years. Within the region, India stands out as the market with the highest trend earnings growth of around 14-15 percent.

On the fundamental side, there are clear signs that domestic recovery has been very strong in India.

Domestic mutual fund cash balance is still running high at about $6 billion, so there is still firepower to support the markets, he said.