'Equity market upside may be significant in next 18-24 months'

This trend reversal could be powerful, with FII India holdings up by 480bps in the past three years: Standard Chartered Bank

Indian equity market's upside is expected to be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, according to a report by Standard Chartered Bank.

"The equity market upside can be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, reversing the four-year sell down trend.

"This trend reversal could be powerful, with FII India holdings up by 480bps in the past three years. This suggests FIIs are already overweight India, but underweight domestic economy sensitive cyclical stocks," the Standard Chartered Bank said in its equity research report.

The Narendra Modi led BJP government's priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle, it said.

It will take time but a sharper-than-expected recovery in GDP growth to 8% by FY17 is not inconceivable. In an optimistic scenario, moderation in inflation and rate cuts can add further fuel, making the recovery broad-based, the report said.

India needs swift policy action like increase the investment rate and reduce the incremental capital output ratio (ICOR) - a measure of productivity - to move towards the growth rate of 6-6.5% in the near term and to remove bottlenecks.

Though the immediate focus would likely to be on improving productivity to the pre-global financial crisis levels, the stronger-than-expected electoral mandate has improved the chances of a quicker-than-expected recovery in the investment cycle as well, according to the report.

"We estimate that USD 80bn/year of external funding support is required to achieve 8% GDP growth - the government's original growth forecast under the 12th Plan (FYP) for FY13-FY17.

"This is based on external debt/equity requirements for infrastructure and other sectors. Reducing political risks and a stable currency can make the requisite external funding support easier to attain, thus aiding the process of economic recovery," the report said.