Mumbai: Foreign brokerages are forecasting around 10% gains for India’s benchmark indices in 2018, betting on a rebound in corporate earnings growth and economic recovery.
On Wednesday, Deutsche Bank set its December Nifty target at 11,500 points, 9.5% higher than the current level. It also said that the implied Sensex target is 37,000 points. A day earlier, CLSA had raised its Nifty target for 2018 to 11,400 points.
The Nifty rose 0.59% to 10,504.80 points on Thursday, while the Sensex closed at 33,969.64 points, up 0.52%. Both indices had gained around 28% in rupee terms in 2017.
The “positivity is premised on the return of economic and earnings growth”, said Abhay Laijawala, head of equity research, Deutsche Bank’s India unit. “We have far more certainty that growth is going to be back. The return of rural purchasing power indicated that rural recovery may return to India after a gap of two-three years. This could significantly boost aggregate demand and eventually lead to higher capacity utilization rates, and this may help catalyse the investment cycle by the end of 2018.”
According to Deutsche Bank, the Nifty will trade at 16.8 times expected earnings over the next 12 months at the end of December. That compares with the five-year average forward multiple of 15.4 times.
CLSA’s target is also based on an earnings recovery.
“We expect the earnings trajectory to improve meaningfully this year with disruptive changes like demonetisation and GST (goods and services tax) implementation behind us and as a solid foundation for long-term improvement in economic growth rates and corporate profitability has been laid,” said CLSA.
Others are more optimistic. IDFC Securities, for instance, forecasts that the Nifty will hit 11,300 points by the end of March because 2017 has been a year of structural reforms such as the GST, increased focus on digitization and fiscal stimulus,recapitalization of state-run banks and the Bharatmala highway-building programme.
“We believe these initiatives will address key issues (non-performing assets leading to weak credit offtake, weakness in small and medium enterprises segment and manufacturing) plaguing the Indian economy in the last few years,” IDFC Securities said.
Others were more sober, pointing to rich valuations and fears of higher inflation, which may derail public finances and the stock market rally.
In a 29 December note, Kotak Institutional Equities said that a large part of the earnings recovery may be largely discounted by current high valuations.
The market’s performance in calendar year 2018 will largely depend on fiscal year 2019’s (expected) earnings being met and continued confidence in the following fiscal year’s earnings as domestic and global macro-environment factors may be less favourable, wrote Kotak analysts.
In any case, analysts seemed to agree on one thing. The record low volatility in 2017 is a thing of the past.
“With growth coming back, there is a risk that inflation could be higher than last year. Bond yields, could remain elevated,” said Laijawala of Deutsche.