Goldman Sachs, on Thursday, downgraded Indian stocks to underweight, and recommended investors to stay selective on concerns of economic growth recovery.

“The investment case for India has turned less favourable. Growth recovery looks elusive, macro vulnerabilities are rising and positioning remains extended,” the bank said in a research report.

“We see further earning cuts and limited room for re-rating. We downgrade India to underweight and recommend investors to stay selective,” it said.

The report, however, favours export-facing sectors, strong balance sheet companies and thematic alpha trades.

On Wednesday, Finance Minister P. Chidambaram had said he expected the economy to grow between 5.5-6 per cent in the current fiscal on the back of global challenges and slowdown in investment.

Goldman Sachs noted that recent activity data has been sluggish with no signs of a pick-up in investment demand. The external funding environment has also become more challenging causing the RBI to tighten liquidity.

Rupee may remain under pressure and the RBI may keep liquidity tighter for the next 3-6 months, it said.

The overall earnings sentiment remains weak, notably in the investment cyclical and capex-related sectors.

The report expects earnings to grow 5 per cent and 11 per cent this year and next, which is below consensus expectations.

It also expect sales growth to moderate further and margins to remain under pressure this year compared to consensus expectations of a margin expansion.

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