Sensex to rise 14 per cent, says Nomura

Post the market rally, returns expectations will need to be tempered.

Indian stocks are “fairly valued” after a 49 percent advance this year and further gains depend on government policies to boost economic growth and pare a budget deficit, Nomura Holdings Inc. said.

The benchmark Bombay Stock Exchange Sensitive Index may rise to 16,400 in the next 12 months, a “muted” 14 percent gain from yesterday's close, Nomura analysts led by Prabhat Awasthi said in a report. Investors should own a mix of so-called defensives and domestic cyclical shares, they added.

The rally this year has helped India post the fifth-best performance among the 89 markets tracked by Bloomberg News globally. Valuations have also climbed, with the Sensex now valued at 16 times reported earnings, double November's low of 8.1 times.

“The relative outperformance and the strong move in the market post elections have now priced in improving economic fundamentals,” the analysts wrote in the report. “The upcoming Budget next month will be very important for the overall direction of the market.”

India has announced three stimulus packages since December, lowering retail fuel prices, cutting taxes on consumer products and injecting capital into state-run banks, to shield the economy from the global crisis.

Finance Minister Pranab Mukherjee will disclose the projected fiscal deficit for the year ending March 31 in his budget on July 6.

The government in February said the deficit may be 5.5 percent of gross domestic product. Nomura recommends that investors buy shares in industries including automobiles, financials, so-called fast-moving consumer goods, technology services, media, pharmaceuticals and power. Its recommended portfolio is “underweight” in energy, metals and cement companies following a jump in their valuations, according to the report.