Securities firm Nomura expects the benchmark Nifty index to return about 17% by December-end 2018. The brokerage has set a target of 11,880 for the index.
“We are looking at a 17% upside for the next calendar year. We are essentially valuing the market at 17 times one year forward earnings,” said Saion Mukherjee, head of equity research, India Global Markets, Nomura.
The brokerage’s positive view on Indian markets is based on expectations of a strong revival in corporate earnings in the coming years and the likely benefits of policy initiatives undertaken by the government in the past two years. Nomura in its report said there has been significant churn across many industries now, and a lot of the excesses have been purged out of the system.
“Following the clean-up, we think the stage is set for a rapid recovery in earnings growth. A low earnings-to-GDP ratio tends to indicate the bottom of the corporate earning cycle, which is followed by a strong earnings recovery. We find this correlation holds in the Indian context as well,” the report said.
The report further said the key risks to their positive view on markets are an increased probability of the incumbent government not coming to power, a substantial increase in commodity prices and a longer-than-expected disruption to economic growth due to policy initiatives.
Regarding sectors, the report said they are overweight on autos, financials, healthcare and metals among others and under weight on IT services, and cement.
On the economy, the report said after two major disruptions, the demonetisation exercise in late 2016 and the introduction of the goods and services tax (GST) in 2017, the Indian economy is now on the cusp of a cyclical recovery.
“Looking ahead in 2018, we think a lot of these disruptions are actually fading away. We have already seen growth pick up in the September quarter. We are expecting a further pick up to 6.7% in the December quarter and we are expecting a growth of 7.5% in 2018,” said Sonal Varma, India chief economist, Nomura.
Nomura said the normalisation of GST-related supply disruptions, the positive effects of bank recapitalisation, a positive remonetisation impulse and a positive fiscal impulse will support this growth. On inflation, Nomura said it expects CPI inflation to average at 4.6% in 2018, with Q2 of 2018 to see the high point of inflation in the 5-5.5% range.
Other leading equity strategists too are expecting another great year for Indian stock markets after the good run in 2017, a year the Nifty gained 25%. Last week, Goldman Sachs in its Economic and Strategy Outlook report said the benchmark Nifty could touch 11,600 by December 2018.