The Indian stock market will surge over the coming year to record highs on solid economic recovery expectations, according to equity strategists polled by Reuters, who said a correction was also likely within the next six months.
A well-received union budget and a strong recovery in corporate earnings boosted the benchmark BSE Sensex Index to an all-time high of 52,516.76 on Feb. 16.
However, that rally took a hit in recent trading sessions on worries about renewed restrictions amid a resurgence in coronavirus cases.
Still, the Feb. 12-23 Reuters poll of 34 equity strategists predicted the Sensex index would rise nearly 3.2% to 52,400 by mid-2021 from Wednesday’s close of 50,781.69, but below the all-time record high.
It was then expected to rise further to reach a record high of 54,000 by end-2021, marking a cumulative gain of over 13% for 2021 and a significant upgrade from levels predicted in November. If realised, it would mark a third consecutive calendar year of over 10% gains.
“Indian equities have made a strong comeback in the past six months due to the faster than expected pace of growth recovery,” said Rajat Agarwal, Asia equity strategist at Societe Generale.
“The expansionary union budget, in sharp contrast to the fiscal conservatism followed over the past decade, has given a fresh impetus to the market. Indian equities remain attractive within the EM (emerging market) space.”
Over two-thirds, or 23, of the 34 strategists said an economic rebound would be the primary driver of Indian stocks over the coming year.
Asia’s third largest economy, which contracted at a record pace last year, was widely expected to have returned to growth last quarter, driven by the Reserve Bank of India’s ultra-easy monetary policy and hopes of vaccine rollouts.
Corporate earnings, which have already shown signs of a robust recovery, were expected to reach their pre-COVID-19 levels within the next six months, according to nearly 75%, or 24, of 33 strategists. That included 11 respondents who said earnings had already reached those levels.
“Markets are anticipating not only a (corporate earnings) recovery to pre-COVID-19 levels but also a significant growth over and above that,” said Amnish Aggarwal, head of research at Prabhudas Lilladher.
“While the next two quarters should be good on a low base, sustenance beyond that is a key factor to watch out for.”
But a correction in Indian equities was likely in the next six months, according to 24 of 33 respondents.
The average price-to-earnings ratio currently for Indian stocks was at a high not seen since at least the turn of the millennium.
“At current valuations the market is clearly expecting a very strong growth recovery and sustenance of growth. A disappointment on the growth front could be a trigger for correction,” added Societe Generale’s Agarwal.