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The Indian benchmark Sensex is the best performing index among major global markets so far this year and this as well as corporate earnings are expected to double over the next four years, a Bank of America Merrill Lynch report says.
The markets may correct about 5% over the next 2 months but in the long-term the outlook remains bullish, the global brokerage firm said, adding that buying in dips is a "compelling strategy".
After five years of being negative on India's earnings growth, the brokerage firm turned positive late last year.
"The Indian Sensex is the best performing market among major global markets so far this year. Our bullishness on the Indian market is driven by our view that the earnings have turned the corner and we will likely see earnings doubling over the next 4 years. We think market returns could mirror earnings growth," it said.
In the near term, the markets, however, may correct around 5% (giving up around half of its post-election result gains) as the pace of reforms is slower than what the market initially built in, the report added.
It said the cyclical recovery coupled with policy reforms would eventually lead to an improvement in profitability of Indian companies.
Secondly, there could be a sharp recovery in earnings as the economy slowly recovers and thirdly, the worst in earnings seems to be over and EPS growth is expected to recover from here on.
"We see GDP growth reviving from its current lows leading to operational leverage for companies as capacity utilisation revives," BofA-ML said.
The brokerage firm sees the decisive political mandate for the BJP leading to an acceleration in the reform process.
Moreover, a faster project clearances and liberalisation of FDI would lead to a revival in the investment cycle.
A reduction in subsidies would also help in reducing fiscal deficit, while lower inflation rate could lead to a fall in interest rates.
Continuing their record setting spree, the NSE Nifty breached the 8,000-mark for the first time ever and BSE Sensex logged a new peak of 26,812.69 in opening trade today on the back of positive economic growth data for the April-June quarter.
