The Indian stock market is expected to remain volatile in the run-up to the general elections due next year and this political uncertainty will limit valuations in the near term as well, says a Nomura report.
The Japanese financial services major, has a Nifty target of 11,380 for December this year.
"Our Nifty target of 11,380 is based on a forward multiple of 16x December 2018F earnings," the report said, adding that sector-wise, it is overweight on financials (particularly retail private banks and insurance), autos, oil and gas, infrastructure /construction and healthcare.
The wide-based Nifty is currently hovering around 10,700 points.
As per the Nomura report, several political developments have raised investor concerns on the incumbent government coming back to power in 2019.
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These include opposition parties attempting to align together to form a third front against the Bharatiya Janata Party, and the BJP's own allies threatening to leave the BJP-led National Democratic Alliance (NDA).
"The Lok Sabha elections due in 2019 are likely to influence market sentiment through mid-2019. A loss for the BJP and the formation of an unstable coalition would hurt valuations, in our view," Nomura said in a research note.
The global brokerage remain positive on earnings growth largely owing to low base of 2017-18.
"We project Nifty earnings CAGR of 24 per cent over FY18-20. However, adverse macro conditions along with political uncertainty will limit valuation upside in the near term," it said.
The report further noted that the thrust on rural and agricultural economy is a certainty in the election year and stocks with focus on rural economy and infrastructure development will benefit from this.
"There are signs of a pickup in the rural economy which are reflected in improving volume growth in rural India reported by FMCG companies, improving sales of tractors and automobiles and expanding agri/tractor financing loan book of NBFCs," it said.
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