With earnings momentum set to take off and domestic investors buying, the equity markets have “material upside” in the next three years, the US brokerage firm BlackRock said in its outlook for Indian markets.
“Equity valuations are reasonable, earnings momentum looks set to take off and domestic investors are buying. We therefore think the 30-stock BSE Sensex index has material upside in the next three years. “Equities could dip 5-10 per cent in the short run, pummelled by a geopolitical hiccup or the anticipation of a US rate rise. Any correction, however, is likely to draw in buyers,” BlackRock said in its outlook.
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BlackRock favours financials, consumer discretionary and small caps, but are lukewarm about staples, the report said. “India has gone from a castaway market to investor darling – in the space of a year. The election of Prime Minster Narendra Modi and the appointment of economist Raghuram Rajan as head of the Reserve Bank of India (RBI) have much to do with it. “Modi and Rajan have set in motion an apparent virtuous cycle: increasing business confidence, accelerating economic growth, deficit reduction, receding inflation, a stable currency and inbound investment. Modi is acting as a hands-on CEO. He has revived stalled investment projects, further curbed government spending and initiated many small changes that make it easier to do business,” the report said.
“Under Rajan’s watch, inflation is coming down, real interest rates have turned positive and the currency has stabilised. We expect India’s GDP growth to accelerate to 7 percent annually in 2015, 2016 and beyond – when many other EM economies are expected to slow. The growth is driven by implementing half-finished projects,” the report said. According to BlackRock, a drive to provide the poor with bank accounts will enable direct transfers of subsidies to the needy, leading to less wastage.
“Combine this with India’s long-term advantages such as an expanding working age population, low debt-to-GDP levels, an edge in key industries such as IT and potential for financial sector growth, and the investment case starts to look pretty compelling. “We have yet to see progress on structural reforms and resolving policy ambiguities in the power sector. The next six months are crucial for investor confidence: Markets are anticipating a clear policy road map in the November-February parliamentary session and budget presentation, as well as rate cuts in 2015. Bottom line is markets need performance above promise,” the report said.