Global research and brokerage firm Goldman Sachs has pegged the Nifty50 target at 12,500 over the medium term and sees mid-teens growth in earnings, which it says is likely to drive the index towards the target.
The Nifty50 index hit the 12,000-mark for the first time ever on Thursday, after the outcome of Lok Sabha elections 2019 brought the Narendra Modi-led National Democratic Alliance (NDA) back to power for a second consecutive term.
"We are overweight on Indian equities and expect Nifty to continue its outperformance relative to the rest of the region. Current equity valuations at 18.4x forward earnings are ‘fair’ relative to our macro models, but we see potential for ‘valuation overshoot’ in the near term," said Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs in a report.
Going forward, Goldman Sachs also expects the banking system's liquidity to normalise as currency in circulation reduces and potential liquidity operations are carried out by the Reserve Bank of India (RBI).
As regards policy initiatives of the new government, land reforms, viz. transparent auctions and digitization of records, labour reforms viz. creating an enabling regulatory environment, privatisation in areas such as agriculture and banking, and export promotion are the four key areas, Goldman Sachs says, which should take centre-stage for the new government.
Most of the major reforms mentioned above, however, would require legislative changes that would need a majority vote in both houses of Parliament. While the NDA looks likely to command a majority in the Lower House, they still remain in a minority in the Upper House (Rajya Sabha), which has elections in a staggered manner. Currently, the BJP and its allies have 102 seats in the Upper House, and would need 21 more seats to gain majority.
“A particularly important signpost for some of these major reforms would be to watch out for the introduction of these issues as bills in the Lower House of Parliament, or model acts produced by the Centre as a guideline for states to follow,” Tilton says.
From a medium-term perspective, Goldman Sachs remains neutral on the rupee, but expects USD/INR to edge higher to 71 over a 12-month horizon.
“We are also neutral on INR rates for now. Bonds could outperform swaps as election uncertainty fades, with risk premia declining as the probability of markets pricing in a more populist government reduces based on the latest vote count, and given that the bond-swap spread is still very wide,” the says Goldman Sachs report.