Mumbai: Indian equity market's upside is expected to be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, according to a report by Standard Chartered Bank.
"The equity market upside can be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, reversing the four-year sell down trend.
"This trend reversal could be powerful, with FII India holdings up by 480bps in the past three years. This suggests FIIs are already overweight India, but underweight domestic economy sensitive cyclical stocks," the Standard Chartered Bank said in its equity research report.
The Narendra Modi led BJP government's priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle, it said.
It will take time but a sharper-than-expected recovery in GDP growth to 8 per cent by FY17 is not inconceivable. In an optimistic scenario, moderation in inflation and rate cuts can add further fuel, making the recovery broad-based, the report said.
India needs swift policy action like increase the investment rate and reduce the incremental capital output ratio (ICOR) - a measure of productivity - to move towards the growth rate of 6-6.5 per cent in the near term and to remove bottlenecks.
Though the immediate focus would likely to be on improving productivity to the pre-global financial crisis levels, the stronger-than-expected electoral mandate has improved the chances of a quicker-than-expected recovery in the investment cycle as well, according to the report.
"We estimate that USD 80bn/year of external funding support is required to achieve 8 per cent GDP growth - the government's original growth forecast under the 12th Plan (FYP) for FY13-FY17.
"This is based on external debt/equity requirements for infrastructure and other sectors. Reducing political risks and a stable currency can make the requisite external funding support easier to attain, thus aiding the process of economic recovery," the report said.
The report further said: "We forecast March 2016 valuation targets under these optimistic assumptions for the economy-centric sectors like banks, cap goods, cement, real estate, oil & gas, consumer discretionary, on a sample of key index/large cap stocks.
"Under the bull case, there could be significant upside in banks, cement and capital goods. While material upside exists for reform driven sectors like oil and gas as well, it is contingent on the government's stance on pricing and subsidy phase-out," the report said.
On FII ownership, the report said, "We estimate the FII ownership in BSE-500 stocks to have reached USD 231 billion currently i.E. 19.2 per cent of the outstanding equity capital, moving up by 480 bps since March 2011.
"It is interesting to note that despite the macro deterioration in the domestic economy over the past 3-4 years, FIIs kept investing albeit in exporters and consumer sectors," the report said.
