Foreign brokerages bullish on Indian markets; growth stocks to lead

The wide-based Nifty is expected to touch 11,500 by December this year, while the benchmark BSE Sensex will be at around 37,000, driven by strong earnings growth, said Deutsche Bank in its recently published report. 

The brokerage’s bullishness stems from the expectation of double-digit earnings growth and forms the keystone of its positive view on the market in 2018. "Our economists expect gross domestic product (GDP) growth to recover from 6.6 per cent in the current fiscal year to 7.5 per cent and 7.8 per cent over FY19 and FY20, respectively," the report said adding that "we expect Nifty earnings to increase 22 per cent in FY19 and 17 per cent in FY20". 

"We are seeing a convergence of factors — global and domestic — that underpins our conviction on both — economic as well as corporate earnings growth recovery," the Deutsche Bank report said. Warning of the lingering impact of demonetisation and the goods and services tax (GST) roll-out, rural purchasing power, and a likely shift in government policy bias towards growth in a pre-election year, are also expected boost growth according to Deutsche Bank. 

In fact, most brokerages globally and domestically acknowledge that 2018 is likely to be a year of high earnings growth. Global giant Morgan Stanley in its India-specific report expects that the market could shift its approach to growth and value stocks. “Since 2014, quality has been progressively losing ground in terms of performance in favour of high beta and momentum. 

2017 has been good for growth and value factors, along with beta and momentum. Overall, we reckon that the market appears to be in a shift to growth and value, i.e., GARP,” Morgan Stanley’s Ridham Desai and Sheela Rathi note in their report. “We think large-cap growth stocks trading at reasonable valuations may continue to be the template for the coming months,” they add. While the overall market mood is reasonably bullish, Deutsche Bank flags off certain key threats to the market in 2018.

For one, record low volatility helped stocks last year. Such a scenario is unlikely to be replicated going ahead, the Deutsche Bank Research Report on India Equity Strategy said. The brokerage cautions that investors must be cognizant of the risks that lie ahead. 

The report further noted that rising prices of oil beyond the already elevated levels currently could be a key risk factor for India. 

"Rising oil prices could imperil macroeconomic stability that India has achieved over the past few years. In case oil prices rise beyond $70/barrel, the government may be compelled to stretch the fiscal deficit as political exigencies in a pre-election year may constrain the government from cutting public spending or raising domestic fuel prices," the report said.