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5 themes likely to drive Indian equities ahead: BoA Merrill

The News International Team

With the pro-reform Narendra Modi led-government coming to power as the first majority government in 30 years at the Centre, India’s political landscape has changed dramatically. Given this strong political mandate, there will be changes to India’s economic factors, which will set the equity markets’ direction in the days to come.

In a research report titled India Equity Strategy, Bank of America Merrill Lynch has identified five evolving themes which investors should keep a close eye on. This report authored by research analysts Jyotivardhan Jaipuria and Anand Kumar.

Also Read: Modi quietly getting on with business; correction seen, says CLSA

Here are the excerpts from the report:

Urban income should grow faster than rural income

Acceleration in GDP growth along with lower interest rates should lead to urban income rising faster than over the past five years. Rural income will likely continue to grow at a healthy clip but probably slower than the past five years as product prices increase at a slower pace and rural wage growth eases off.

Rupee depreciation should give way to stable currency

Over the past five years, rupee has depreciated 27 percent. Near-term worries of USD strength aside, we think the currency will be flat to slightly stronger over the next five years current account deficit and RBI re-coups reserves. We see the currency in the near term being flattish in the Rs 58-62/USD range and over the next five years appreciating slightly.

From rising interest rates to falling interest rates

Over the past five years, interest rates have risen 300bp. We think a lower fiscal deficit and lower inflation will enable the RBI to cut rates.

From earnings downgrades to earnings upgrades

From a sharp spell of earnings downgrades over the past few years, we expect earnings to be upgraded from next year. Over four years, we see earnings in India doubling as operating leverage leads to mean reversion in margins.

Investment spend to drive GDP

This is a late cycle play and will probably be seen over the next 24 months as business confidence improves and government accelerates project clearances.


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