After staying flat for a major part of the year since last Diwali, the Sensex has given 10 per cent returns. A large part has come after the reforms push in September.
In the short term, the Street will keep an eye out for global developments (US fiscal front and Euro zone), the winter session of Parliament and the country’s last full Budget before the general elections. While there are a number of challenges, experts are upbeat on markets over the next year, as fundamentals are looking better, valuations are reasonable and the earnings cycle is turning. “Over the next 12-18 months, we could see a bull market. During this period, we are looking for a Sensex target of about 23,000 (upside of 19 per cent from current levels),” says Saurabh Mukherjea, head of equities, Ambit Capital.
In addition to keeping high quality stocks with balance sheet strength and revenue visibility, experts say investors with higher risk appetite could selectively go for good names in high beta/rate sensitive sectors (capital goods, infrastructure and banking, given expectations of a 75-100 basis points cut in rates), turnaround plays and quality small/mid-caps.
During the last downturn, mid- and small-cap companies suffered both in terms of fundamentals and perception, leading to a wide valuation gap between small and big stocks. “We could see during the bull market over the next six months the mid- and small-caps outperforming. And, as the economy recovers and the earnings improve, the valuations gap between the mid-cap and large-cap will ease, too, leading to higher gains,” says Ambit’s Mukherjea.
Among larger companies, experts are positive on ICICI Bank, Maruti Suzuki, Coal India, Larsen & Toubro, Tata Motors, LIC Housing, Ashok Leyland, TCS and Bharti Airtel. Though the markets have gone up recently, the positive outlook stems from reasonable valuations — about 15 times one-year forward earnings, close to the historical long-term average. More, since the earnings cycle is seen reversing, the risk-to-reward ratio is considered to be favourable. Additionally, liquidity can provide huge support, given the easy monetary policies of the developed world. Domestically, the continuity of reforms and government’s efforts to revive the economy are also seen in a positive vein. Steps such as implementation of the Goods and Services Tax, curtailing the fiscal deficit through divestments in public sector units and reduction in the subsidy bill could boost market sentiment. So will any further rate cuts by the Reserve Bank, which could be key catalysts for extension of the rally.
However, experts also believe the next leg of the market rally might not be as easy. “The fiscal cliff in the US is expected to be the first big test for global equities. EU chiefs will also have to keep working hard to avoid catastrophes. And, more important, Indian policy makers will face a big test in the ensuing winter session. The last budget before the 2014 elections will also be important," says Dipen Shah, head-private client group research, Kotak Securities.