Bull run for Indian equities will continue in 2018

Equity strategists are basing their expectation on strong corporate earnings recovery, supportive global economic growth, and gradual improvement in business sentiment.

Indian equities have rallied more than 25 per cent in 2017, but most equity strategists are not yet calling an end to the bull market. Foreign brokerages forecast the benchmark Nifty to deliver returns of more than 15 per cent by December 2018.

Equity strategists are basing their expectation on strong corporate earnings recovery, supportive global economic growth, and gradual improvement in business sentiment.

“We are positive on Indian equities for 2018 and forecast a 17 per cent Nifty return for the year.

"We foresee a strong multi-year corporate earnings recovery ahead. We also expect the policy initiatives to bear fruit, supporting the valuation multiples,” said Saion Mukherjee, managing director and head of India equity research at Nomura, in a note on Thursday.

The brokerage has set the December 2018 target of 11,880 for the Nifty, based on 17 times earnings forecast for calendar year 2019 (one-year forward).

HSBC equity strategists Herald van der Linde and Devendra Joshi echo similar views.

“Following their impressive performance in 2017, we remain constructive on Asian equities in 2018. We foresee a 15 per cent upside.”

A positive tide in Asian equities could benefit India as well. Last week, Goldman Sachs set a December 2018 target of 11,600 for the Nifty on expectations of robust earnings growth.

“We expect solid earnings growth delivery in the next year and the following year. We see that as a credible backdrop for India to continue to perform,” said Timothy Moe, chief Asia-Pacific equity strategist for Goldman Sachs.

This year’s rally in Indian equities has been driven by valuation re-rating, not by earnings growth, as demonstrated by some Asian peers like South Korea.

The Nifty currently trades at over 18 times its one-year forward earnings estimate, compared to long-term trading average of 16 times.

Earnings upgrades are expected to underpin gains going forward.

“Earnings have been the key disappointment for markets over the past few years.

"Corporate earnings-to-GDP ratio is at its lows, with significant contraction in margins and return on equity (ROE).

"We believe we are at the cusp of a business up-cycle and are set for a multi-year recovery going ahead. Earnings growth can be higher than 20 per cent in FY19F and sustain,” said Mukherjee.

Bank of America Merrill Lynch (BofA-ML), while bullish on domestic earnings recovery, is skeptical on market prospects in 2018, particularly the second half.

It expects the market to top in the first half of next calendar and correct thereafter as global central banks’ liquidity begins to withdraw.

“All evidence of the past 12 months suggests India is joined at the hip to the global tide, irrespective of its differentiated long-term growth potential.

"Even as forecasting the global tide is an extremely challenging exercise, it is to our minds the largest risk to Indian equity prices going in 2018,” says Sanjay Mookim, India equity strategist, BofA-ML.

The brokerage expects the benchmark indices to end flat next year.

Photograph: Danish Sidiqui/Reuters