Goldman Sachs: India's first-half stock performance hits 30-year low, favor defensive sectors for the second half
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Goldman Sachs: India's first-half stock performance hits 30-year low, favor defensive sectors for the second half
India's equity market underperformed regionally by its worst margin in 30 years during the first half of the year due to deficient monsoons and downward earnings revisions. However, foreign institutional investor outflows have slowed, and Goldman Sachs expects the market to recover in the second half as energy prices drop and currency pressures ease. They recommend focusing on defensive sectors.
- India's relative return against regional markets was the weakest in three decades, with NIFTY falling 9% in local currency terms
- Monsoon rainfall was approximately 30% below normal levels, leading to a 30% year-on-year decrease in summer crop sowing
- Foreign investors' selling pressure has abated over the past three weeks, though net outflows still reached $29 billion year-to-date
- Consensus expectations remain mildly negative ahead of the second-quarter earnings season, with commodities and high exchange rates expected to squeeze profit margins
- Goldman Sachs forecasts NIFTY to reach 26,500 points by June 2027, preferring defensive sectors over cyclical ones
Report interpretation
Overview
This report published by Goldman Sachs reviews the performance of India's stock market in the first half of 2026 and looks forward to the outlook for the remainder of the year. Despite NIFTY rebounding 1% this week, it fell 9% in rupee terms year-to-date, marking its weakest performance against regional peers in 30 years. Key factors weighing on the market include insufficient monsoon rains affecting agricultural planting, reduced corporate earnings outlook, and persistent foreign capital outflows. However, recent signs suggest easing pressure from foreign sellers, and with decreasing energy costs and relief from rupee exchange rate strain, there may be positive momentum later in the year. Goldman Sachs maintains a long-term bullish view on NIFTY, targeting 26,500 points by June 2027, advising investors to overweight resilient sectors given the current environment.
Core views
Market Performance and Structural Divergence in the First Half: In the first half of 2026, India’s equities lagged globally, with the NIFTY index dropping 9% in local currency and its weightage within the APxJ Index declining from 15% at the start of the year to 11%. On an industry basis, commodity-related sectors led gains while consumer and financial stocks trailed behind. Among exporters, IT performed exceptionally well despite a 30% decline. Macroeconomic Fundamentals Challenges: The monsoon season poses a significant risk to the economy. By early July, cumulative monsoon rainfall stood about 33% below average, with 60% of regions experiencing below-normal rainfall and reservoir levels the lowest they’ve been in two years. As a result, summer crop acreage decreased by 30% compared to last year, accompanied by slowing farm tractor sales. Additionally, June manufacturing PMI dipped to its lowest point in three months yet remained in expansion territory; May saw fiscal surplus boosted by record dividends from the Reserve Bank of India. Profitability and Valuation Pressures: Before the Q2 earnings season, consensus views leaned slightly negatively toward earnings adjustments. High commodity prices and a weakening currency are expected to compress margins further, according to Goldman Sachs estimates which anticipate additional downward revisions to EPS figures. From a valuation standpoint, MSCI India’s forward P/E ratio stands at 20.3 times, offering roughly a 67% premium over MXAPJ. Shifts in Capital Flows: Foreign institutional investors’ (FII) selling intensity eased over the past few weeks, registering a modest inflow of $50 million recently, although net outflows totaled $29 billion so far this year. Domestic institutional investors (DII) recorded purchases amounting to $1.5 billion for the same period and accumulated buying worth $51 billion since January. Configuration ratios of global active funds in India hit near-two-decade lows, redirecting flows towards Korea and Taiwan recently. Meanwhile, domestic fund inflows moderated in May, reversing gold ETF inflows for the first time in 13 months.
Analysis framework
Goldman Sachs employs a top-down analytical framework. Initially, through horizontal comparisons between India and other Asian markets, the study identifies the poor standing of India's equity market and notes its dwindling weighting in regional indices. Subsequently, it conducts depth analysis into monsoon data, agricultural practices, and manufacturing indicators to assess supply-side disruptions impacting real economy fundamentals. At the micro-level, incorporating trends in analyst-driven earnings revisions alongside PE multiples helps evaluate whether prevailing valuations reflect anticipated adverse outcomes. Finally, tracking FII and DII investment flow patterns assists in gauging liquidity support within the market, ultimately concluding that improved macro conditions could pave the way for recovery in H2.
Methodology notes
Impact of Monsoon Rainfall on Agricultural Supply
In an agrarian economy like India, monsoon rainfalls determine crop outputs fundamentally. This report directly infers implications for food output expectations and related demand changes by monitoring deviations of rainfall from norms and reservoir storage levels—a crucial indicator when assessing India's fundamental economic picture.
Relative Returns vs Benchmark Comparison
By comparing India's equity performance with benchmarks such as MXAPJ and other global indices, researchers compute differential returns and shifts in weightages. Such methods help distinguish whether underperformance arises from broad beta fluctuations or idiosyncratic alpha deficits specific to India, thereby informing decisions around asset allocation attractiveness internationally.
Convergent Trends in Foreign vs Local Investor Movements
Analyzing net transaction data from both FIIs and DIIs reveals directions taken by market participants regarding ownership transfers. When substantial exits occur among foreigners met by absorption domestically, it often signals internalization of control mechanisms, thus aiding assessment of underlying support beneath market troughs.
Key data
- Nifty Year-To-Date Change-9% (Rupee Terms)Worst showing versus regional peers in 30 years
- Deviation in Monsoon Rainfall-33%Total rainfall deficit between June 1st and July 2nd
- YoY Summer Crop Acreage Shift-30%Decrease compared to corresponding period last year
- Forward PE Ratio of MSCI India20.3xApproximately 67% higher than MXAPJ
- Net FII Flow YTD-$29bnRecent selling pressure subsided, registering +$50mn weekly inflows
- Net DII Flow YTD+${}51bnWeekly transactions included ${}1.5bn buys
- Projected Target Level For Nifty26,500Expected attainment by June 2027
Impact & implications
While the first half witnessed subpar performance from India's market landscape, prospects for improvement emerge as energy cost reductions enhance growth potential and RBI interventions mitigate rupee volatility. Investors should adopt defensive strategies now, prioritizing non-cyclical sectors less sensitive to economic cycles instead of overtly investing in volatile areas. Continuous monitoring of subsequent monsoon updates and their repercussions on rural consumption capabilities remains vital.
Risks
- Persistently inadequate monsoonal rains might drive further declines in agri-produce, undermining rural purchasing power and inflation dynamics
- Ongoing elevated commodity prices combined with currency depreciation could keep squeezing corporate profits
- Prolonged exodus of foreign capital risks tightening liquidity and pressurizing valuations
- Sluggishness in global growth scenarios might impair export-oriented segments of India’s industries
What to watch
- Upcoming monsoonal rainfall reports and variations in reservoir reserves
- Progression of Q2 corporate earnings seasons including any revision trajectories
- Continuity of FII capital movement trends
- Reserve Bank of India monetary policies along with movements in INR exchange rates