Indian equities are in a multi-year bull story with capex cycle recovery as the main driver.
Despite the 5% correction seen in the benchmark indices during calendar year 2015 (CY15), Societe Generale believes that the Indian equities are a multi-year bull story and pegs the 2016-end S&P BSE Sensex target at 32,000, an upside of 23% over the next one year driven by capex cycle recovery.
By 2017-end, it expects the 30-share index to hit 36,000 and then correct to 31,000 by 2018-end.
"Capex is the main driver of Indian equities. The government has projected an increase in infrastructure spending at an annualised rate of 12% over the period of the 12th five-year plan (2013-17). This should boost GDP growth. Monetary policy loosening will help corporate earnings recover going ahead," said Frank Benzimra, head of Asia equity strategy, Societe Generale Corporate & Investment Banking.
In the Indian context, its key calls for 2016 include going long on Nifty, financials, industrials and discretionary sectors.
Though Societe Generale remains constructive on the Indian economy, it believes that some of the current optimism is overdone with respect to structural reforms.
Going ahead, uncertainty in China, Societe Generale says, will be a source of volatility and sees Asia as a clear source of risk.
As a strategy, it advocates buying into Eastern Europe, as euro area growth continues to accelerate, and Russia.
"Overall, we remain cautious on South East Asia equity markets on expectations of currency underperformance and favour markets where the domestic agenda prevails (India and Japan). In Japan, equities benefit from ROE (return on equity) normalisation, a weak yen and firming growth," Benzimra says.
Adding: "We tactically downgrade China to underweight as valuations are not low enough to reflect mounting concerns on growth, debt and currency. On the other hand, Korea equities are inexpensive but lack catalysts."
Given that the US Federal Reserve (US Fed) is likely to hike rates for the first time in nearly a decade, Societe Generale expects the US dollar to appreciate going ahead given the divergence between its monetary policy and that of the rest of the world.
It expects the US economy to slip into recession in the second half of 2018.
"Going ahead, we will see divergent monetary policies with the US Fed, and the Bank of England (BoE) tightening on one hand, and the European Central Bank (ECB), Bank of Japan (BOJ), and Peoples Bank of China (PBoC) easing. The Reserve Bank of India could keep rates unchanged in 2016," said Klaus Baader, Chief Asia Pacific Economist at Societe Generale.
Oil prices
In the first half of 2016, it expects oil prices to rise marginally from the current levels, as the markets have found the price range that is low enough to encourage healthy demand growth and reduce US and other expensive non-OPEC supply.
"Based on roughly balanced OECD stocks in H2, it forecasts Brent at $55 in Q3CY16 and $60 in Q4CY16. On an annual basis, Brent should average $54 in 2016, flat with 2015. In line with a gradually rebalancing oil market in the coming years, we forecast Brent at $62.50 in 2017, $67.50 in 2018, $70 in 2019, and $75 in 2020," Societe Generale says.
