Expect strong returns in new Samvat

Experts say the BSE Sensex could rise to around 32,000 in a year

Contrary to expectation of a runaway rally, Samvat 2071 has been a year of consolidation for the Indian markets. Though the benchmark indices, the S&P BSE Sensex and the CNX Nifty, managed to hit lifetime highs of 30,000 and 9,100, respectively, the benchmarks have lost around 12 per cent each from their peaks to 26,265 (S&P BSE Sensex) and 7,954 (CNX Nifty). As a result, the broader indices are down marginally. If they end in the red on Wednesday, when Samvat 2071 ends, it will be the third annual decline in a decade.

At the global level, concerns regarding the possibility of the US Federal Reserve raising interest rates, an economic slowdown in China, Greece exiting the euro zone and falling crude oil prices forced the hand of foreign institutional investors (FIIs) and affected sentiment. At the domestic level, the possibility of a sub-par monsoon that could stoke inflation, lower-than-expected growth in corporate earnings in the first two quarters, slow pace of reforms and the Reserve Bank of India's (RBI's) initial reluctance to cut key interest rates, given the global situation, kept sentiment in check for most part of the year.

The road ahead
So, what is in store for the new Samvat, and which stocks are expected to do well? Analysts expect Samvat 2072 to be marked by volatility, as investors eye the first rate rise by the Fed in several years, developments in China and the euro zone, beside domestic factors like the interest rate trajectory, policy reforms by the Narendra Modi government and a hope of pick-up in corporate earnings.

However, most experts maintain a positive view on the markets. They believe favourable Indian macro cues such as low inflation, declining interest rates, cheap global commodities and strong governance are likely to drive improvement in corporate performance over the next 18-24 months.

India, they suggest, is best placed within the emerging economies' space and is likely to continue attracting higher fund inflows in the medium term, notwithstanding any near term global concerns. Notably, even foreign direct investment (FDI) flows into India have been strong in the current year.

"The long-term story for Indian equities remains intact, notwithstanding near-term earnings disappointments. Structural positives of lower inflation, demographics-driven developmental politics and rising domestic equity inflows suggest a bright outlook over the longer term. We expect corporate earnings growth of 16-18 per cent over FY17-19 and expect the market to deliver a cumulative 34 per cent return by September 2017," points out Mahesh Nandurkar of CLSA in a recent report co-authored with Abhinav Sinha and Alok Srivastava.

G Chokkalingam, founder and managing director of Equinomics Research & Advisory, is also bullish. He expects the S&P BSE Sensex to trade around 32,000 by the next Samvat.

"The triggers include cheap oil prices, which in turn will help in keeping the current account and the fiscal situation under check; turnaround in the industrial economy leading to an improvement in corporate earnings; robust inflows on both FDI and FIIs accounts; and India's GDP growth improving to near eight per cent," he says.

Most other experts have a positive view. Dinesh Thakkar, chairman, Angel Broking, expects the Sensex EPS (earnings per share) to grow around 11 per cent in FY16 and 17 per cent in FY17, with an upward bias. "Attributing an 18x multiple to our FY17 estimated Sensex EPS, we arrive at a target of 31,500 for the Sensex, with a 12-18 month horizon," he says.

Given the likely pick-up in earnings, Vivek R Misra, Asian equity strategist at Societe Generale, expects the Nifty will end 2016 at 10,750 and suggests the S&P BSE Sensex could hit the 35,000 levels by then. He prefers information technology (IT), financials, industrials and the consumer discretionary sectors. "On the other hand, we are avoiding expensive non-cyclical goods and services, primarily from consumer staples, healthcare and telecoms. We are also cautious on the high-debt sectors, including energy, materials and utilities," he says.

Key risks
Global geo-political concerns, a decline in foreign inflows, sharp currency movements and a spike in oil prices are the top risks to markets in Samvat 2072, analysts say. Another risk factor is the possibility of global deflationary factors further strengthening. Significant weakening of economic growth in China, the euro-zone and Japan from current levels can cause a lot of volatility in the global as well as domestic markets, they caution.

For a list of top picks, see the table.