Goldman Sachs' Nifty target of 7600 needs to be taken with a pinch of salt

 goldman sachsVivek Kaul  
The investment bank Goldman Sachs is at it again. In a report dated March 14, 2014, the bank said that it expects the Nifty index to touch 7600 points during 2014. As I write this (on March 19, 2014, around noon) the Nifty is at around 6526 points.
This means that the Nifty needs to rally by around 16.5% from its current level to touch 7600 points. And if the Sensex rallies by similar levels it will cross 25,000 points during the course of the year.
Goldman Sachs offered a spate of reasons justifying the target of 7600 points for the Nifty (
You can read them here). The only trouble here is that similar predictions made by Goldman Sachs in the past have gone majorly wrong.
Blogger and analyst Deepak Shenoy writes about these predictions in a post on his blog In November 2012, Goldman Sachs predicted that India will grow by 6.5% during 2013. The actual growth came in at less than 5%.
In March 2012, the investment bank predicted that by March 2013, 
Nifty would touch 6100 points. As on March 28, 2013, the Nifty was way lower at 5682.55 points. In August 2011, the investment bank predicted that by September 2012, the Nifty would touch 6600 points. As on September 28, 2012, the Nifty was at 5730.3 points. It only got anywhere near 6600 points very recently.
So that is how the past predictions of Goldman Sachs have gone. Hence, why take this new prediction seriously?
In fact, truth be told, Goldman Sachs is not the only financial firm making such predictions. They come by the dozen. Here are a few such predictions that were made at the beginning of this year. CLSA has predicted that the Sensex will touch 23,500 points by December 2014. Deutsche Bank Markets Research did better than CLSA and predicted that Sensex will touch 24,000 points by the end of this year. And Goldman Sachs in an earlier report dated November 5, 2013, had predicted that the Nifty would touch 6900 points by the end of 2014. This target has now been upped to 7600 points.
The economist John Kenneth Galbraith termed the entire business of prediction as a fraud. As he writes in
The Economics of Innocent Fraud “The fraud begins with a controlling fact, inescapably evident but universally ignored. It is that the future of economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold. There are more ample predictions but no firm knowledge.”
And why is that? “There is the variable effect of exports, imports, capital movements and corporate, public and government reaction thereto. Thus the all-too-evident-fact: The combined result of the unknown cannot be known,” writes Galbraith.
Given this, why are such predictions made? For one, making such predictions is a fairly lucrative career option. Also, investors (like most other people) want to know in which direction are the markets headed. In the recent past, there have been a spate of reports which essentially have been telling us that markets will continue to go up, because Narendra Modi will be the next prime minister of India.
The stock market investors are largely supporters of Modi, and any report that links Modi and the stock market going up is music to their ears. Sometime back an Indian stock brokerage predicted that Narendra Modi is likely to win the next elections and even made projections on how many seats the Bhartiya Janata Party is likely to win. This after some of its analysts had travelled six hundred kilometres through fifteen districts.
In a country where the most detailed polls go wrong, how can anyone in their right mind make a prediction on the number of seats a party is likely to win, after travelling through just 15 districts? The report was immediately lapped up by the pink papers and their readers, given that Narendra Modi winning the elections is music to their ears. As Galbraith puts it “The men and women so engaged believe and are believed by others to have knowledge of the unknown; research is thought to create such knowledge. Because what is predicted is what others wish to hear and what they wish to profit or have some return from, hope or need covers reality.”
Also, financial firms need a story to sell stocks to their clients. As the old saying goes, every bull market has a theory behind it. Andy Kessler, who used to be analyst with Morgan Stanley, recalls his experience in 
Wall Street Meat. As he writes “The market opens for trading five days a week… Companies report earnings once every quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days [250 days – the four days on which companies declare quarterly results]. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table—whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions.”
Predicting which way the stock market is headed is also a part of this game. Also, revising targets is an important part of this game. As Kessler writes “For some reason, Morgan Stanley was into price targets. I hated them. To me, they were pure marketing fluff. I would recommend Intel at, say $25. The first question I would get is what is my price target. My answer would be $40 for no particularly good reason. It was high enough to interest investors, but I was guaranteed to be wrong. If it hit $38, it was a great call, but I was wrong. If it went to $60, it was an even better call, but I was still wrong. What usually happened was that if the stock hit $35, I was asked to adjust my price target to $50, so that sales force would have a call to go out with.”
Let’s understand this in the context of Goldman Sachs’ Nifty target of 7600. In November 2013, the firm predicted that Nifty would touch 6900 by the end of 2014. Three months into the year the Nifty has already crossed 6500 points and hence, a target of 6900 points doesn’t sound ‘sexy’ enough. The solution, of course, is a new target which is at a much higher 7600 points.
What this also does is that it gives the financial firm a lot of coverage in the media. Every pink paper in the country, along with almost all business news websites have carried the news about Goldman Sachs’ new Nifty target. So, in a way it’s free advertising for Goldman Sachs.
Interestingly, when the stock market hit an all time high in January 2008, a stock brokerage which was looking to go public, released a report saying that the Sensex will touch 25,000 points before the end of the year. The report was covered comprehensively through the day across all business news channels. The next day the pink papers also splashed the news big time. So, the stock brokerage got the publicity that it needed. Of course, the Sensex still hasn’t touched 25,000 points, more than six years later.
This is not to say that the Sensex will not cross 25,000 by the end of the year or the Nifty will not touch 7600 points, as predicted by Goldman Sachs. For you all we know that might turn out to be the case. And the analysts at Goldman will then be termed as visionary. But when it comes to markets, it is always worth remembering what John Maynard Keynes, the great man that he was, once said: “Markets can remain irrational longer than you can remain solvent.”  

The article originally appeared on on March 19, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)