Equity outlook: Our twelve-month Sensex target is 24,600

The equity markets are set for a strong run supported by positive global cues, as well as improving domestic economic outlook. The gradual tapering of the Federal Reserve's monetary stimulus indicates confidence in the firm economic recovery in the US. In the medium-term, a revival of growth in advanced economies is beneficial for export demand from emerging economies such as India.

The robust export performance, coupled with a compression of imports led by gold, has led to a substantial narrowing in the current account deficit to comfortable levels. Our strong growth in exports has been aided by the sharp rupee depreciation, as well as recovery in external demand. The pick-up in banking capital, non-resident Indian deposits and debt inflows on the back of measures announced by the Reserve Bank of India (RBI) has also rendered financing of the deficit more manageable. Due to these factors, I believe, the Indian economy is much better prepared now to tackle risks on the external sector.

Real GDP growth in the economy is also expected to bottom out during FY2014. During the second quarter of FY2014, GDP growth paced higher to 4.8 per cent from 4.4 per cent in the previous quarter driven largely by export and agricultural performance. Going ahead, after the general elections of 2014, I believe the policy environment would improve and in turn lead to a revival in the investment cycle. Irrespective of the new government that comes to power in the elections, the focus is likely to remain firmly on stimulating capex and creating more employment and investment avenues to kick-start growth in the economy. Over the next four to six months, as general elections draw closer, markets are likely to be positively poised on expectations of a strong mandate for a government promoting reform-led and good governance agenda.

At present, inflation remains the key overhang on the outlook. However, Wholesale Price Index-based and Consumer Price Index -based inflations have paced higher, largely on account of a surge in vegetable prices, which is expected to be temporary in nature. Owing to indications of easing in these prices, RBI has also kept its policy rates unchanged. Going forward, on account of the improvement in agricultural production, I do believe, food prices are likely to moderate and ease inflationary pressures to that extent. This, in turn, is likely to provide more headroom to RBI to veer towards a more growth-supportive stance in the next three to six months.

In the light of these positive developments and attributing a 16 times multiple to our Sensex EPS, we arrive at a Sensex target of 24,600 in the next 12 months. Beyond this, I believe, the markets are likely to at least give returns in line with the expected 13-15 per cent earnings growth. Driven by revival in advanced economies and also the impact of depreciation on a year-on-year basis, I believe, strong export growth is likely to continue. Hence, I'm positive on the outlook for export-oriented sectors such as information technology and pharmaceuticals. I'm also overweight on select metal stocks, considering recent capacity additions and under-utilised capacity getting employed for exports as global fundamentals are on an improving trajectory. In light of positive cyclical factors shaping up, I also selectively prefer large private banks, as these continue to remain structurally strong and believe they are likely to benefit from an imminent economic revival.

The author is chairman & managing director, Angel Broking