"In the medium term, we remain cautious about earnings estimates and relative valuations. Earnings downgrade cycle is not yet over and we are in the final stages of earnings decline," BNP Paribas Securities India Asia Pacific Strategist Manishi Raychaudhuri told reporters here.
"We see Sensex to touch 22,000 in 2014. The out-performance of the Indian market could continue for some more time because the euphoria about local developments is for the time being, taking precedence over global concerns," Raychaudhuri said.
"We believe that Asian ROEs are likely to improve in 2014, albeit marginally. Recovery could be driven by China, HK, India, Malaysia and Philippines among countries and industrials, consumers and financials among sectors," he said.
He added that while concerns about tapering of stimulus by the US Fed might crop up from time to time, the impact of such concerns on the Indian market could be far lower when tapering actually starts.
Commenting on Indian political scenario, Raychaudhuri said the market participants have attributed recent performance of the domestic equity markets partly to markets' hope of an industry-friendly government at the Centre. Recent polls predict a significantly better result for the opposition BJP than the ruling Congress in 2014.
"Our analysis of electorate demographics, seat share and vote share across states shows that the hurdle for the BJP-led NDA to regain power remains high. Corporates are looking for 'pro-growth' or 'industry-friendly' government," Raychaudhury said, adding that though the government projects are going through, private sector projects are at a standstill.
Corporates are worried as governments decision making needs to change, he said.
The road ahead for the Indian economy remains a long one. Over the next few quarters, tailwinds from agricultural sector and an improved export performance should continue to blow, limiting any further downside to economic growth, he added.
He said that given the prospect of further policy tightening from more hawkish RBI and the need for Finance Minister P Chidambaram to once again squeeze departmental spending to keep fiscal targets on track, policy settings are also likely to be an important headwind to growth for the next few quarters.
"Improved competitiveness from a weaker currency and improved global growth outlook have helped India's export performance. We believe a better export performance and lower imports mean that the problem of higher CAD and the need for 'hot money' financing will be much lower in FY'14 and FY'15.
"We estimate CAD at USD 52 billion (2.8 per cent of GDP) in FY14 and USD 47 billion (2.3 per cent of GDP) in FY15 - within the range that Indian policymakers believe to be safe," Raychaudhuri added.