RBS Private Banking believes the stock market would fare better in the second half of this year compared with the first, owing to government action on the domestic front, as well as developments on the global front.
The Indian arm of the UK-based bank estimates that by December, the National Stock Exchange’s 50-share Nifty would touch 6,200, a 16 per cent rise from its current level. The index has risen 13 per cent in the first half this year. On Tuesday, the Nifty closed at 5,336.7, up 54.15 points, or 1.03 per cent.
“We believe the government will take some important policy decisions in the next 45 days, as it has a very tight window before elections in some key states,” said Rajesh Cheruvu, chief investment officer (India). “Coordinated policy action in the Euro zone, as well on the domestic front, could see Indian equities outperform in the second half,” he added.
Cheruvu said Indian equities were attractive from a multi-year investment perspective, as these came at a discount. “The Nifty is trading at a seven per cent discount to its one-year forward price-to-earnings multiple. On a price-to-book basis, the market is trading at a 25 per cent discount, while on a dividend-yield basis, the shares are at a 16 per cent discount,” he said.
RBS Private Banking believes easing input cost pressures and interest rate cuts would aid a recovery in the earnings and investment cycle, and this would boost equity market valuations. It expects the Reserve Bank of India to slash interest rates by 50 basis points this year.
It also estimates the earnings per share of Nifty companies to grow at a compounded rate of 15 per cent to Rs 450 by December 2014.
“Current growth concerns need to be addressed by a strong fiscal response. The absence of efforts towards subsidy rationalisation and the sustained decline of the rupee pose risks to the government’s ability to meet its fiscal target,” Cheruvu said, adding portfolio flows into Indian stocks would continue to remain strong, helped by expected liquidity easing in the US and Europe. “QE 3 (a third round of quantitative easing) is almost a given, but the market would be looking at the form and the size….Any disappointment in the size and the form of QE3 would be negative for the markets. Domestically, policy delays or a further deepening in the monsoon deficit would prove to be a downside risk for the market,” he added.
For December, RBS Private Banking has a base case target of 5,600-5,700 for the Nifty.