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Goldman cuts earnings forecasts for South Asia

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Despite the selloff, South Asia's markets have further to fall, Goldman Sachs said, cutting its targets for the region.

"Slower growth and tighter liquidity now justify lower valuation multiples," Goldman said in a research note, adding that margin assumptions in earnings forecasts looked optimistic.

While Southeast Asia's valuations have already pulled back "meaningfully", as markets price in the Federal Reserve's plan to taper its asset purchases, the region's valuations still look stretched, Goldman said, adding that it expected 5-to-10 percent valuation downside.

(Read more: Goldman upgrades China growth, cuts India outlook)

It cut its earnings growth expectations for 2013 and 2014 for the region to 4 percent and 10 percent respectively, down from 6 percent and 12 percent.

Goldman saw significant further downside ahead for the region's stock markets, which have fallen between 3 percent and 19 percent over the past three months.

Goldman cut its rating for Thailand to marketweight from overweight, citing concerns about high leverage and the potential for higher levels of non-performing loans, as the economy slows.

(Read more: Asia stocks go one way, Chine sure to go the other)

It also cut Indonesia from marketweight to underweight, citing high inflation and the significant current account deficit, even though Indonesia's valuations have fallen to around historical averages. Goldman said it expected "significant downside risks" to consensus earnings forecasts for Indonesia.

The bank kept an underweight call on India, expecting weak earnings and economic growth. "Foreigners have only sold $4 billion of Indian equities so far. Relative to the $12 billion of year-to-date inflows, positioning looks extended."

But it raised the Philippines to marketweight from underweight, as the country's valuations have become less expensive, its economic growth remains strong and the bank expects higher earnings growth forecasts.

(Read more: Just what will stop the emerging market carnage?)

Outside the region, Goldman remained overweight on Japanese and European equities, but underweight on the U.S. and Asia ex-Japan on a 12-month view.

"We see strong longer-term return potential in Europe from a recovery of cyclically weak margins. With high frequency data continuing to support our view of a gradual improvement in European growth we think some of this potential will turn into outperformance over 12 months," Goldman said.

"In the U.S., valuations are higher than in other regions and margins are close to record highs, leaving less room for a cyclical recovery than elsewhere."

For Japan, Goldman saw catalysts from significant policy changes, the weakening of the yen, growing evidence of rising inflation and expanding profits.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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