Global brokerage firms see Nifty hitting 10,400-10,500 and Sensex 37,000 in 2018

Two global brokerage firms which have come out with their yearly outlook for Indian markets for the year 2018 suggest that the rally in Indian markets is not over yet.

Investors who are looking to enter can either wait for a dip or enter at current levels as the rally is likely to extend towards 10,400-10,500 on Nifty, which translates into an upside of nearly 1,000 points or 9 percent from current level while for the Sensex it could be closer to 37000.

Indian markets rallied 29 percent in the year 2017 thanks to global and domestic liquidity which helped our markets to climb every wall of worry, but 2018 will be different. Analysts advise investors to trim down their return expectations for the calendar year as the journey will not be smooth.

As we step into 2018, Indian macro picture which was the strongest among other Asian peers looks shaky especially with crude on the rise. The first GDP estimates by CSO last week suggest a slowdown in the economy. Earnings are yet to recover for India Inc.

Data released by CSO last week highlighted that India will likely grow at 6.5 percent in 2017-18, slower than the previous year’s 7.1 percent expansion.

But, even though the economy seems to be slowing down which according to most experts it is a temporary phenomenon. Economists’ expect gross value added (GVA) growth to rise to around 6.6 percent in Q3 FY2018 and a sharp 7.5 percent in Q4 FY2018.

"Our economists expect GDP growth to recover from 6.6 percent in the current fiscal year to 7.5 percent and 7.8 percent over FY19 and FY20, respectively," the report said adding that "we expect Nifty earnings to increase 22 percent in FY19 and 17 percent in FY20,” the Deutsche Bank Research Report on India Equity Strategy said.

"We are setting our year-end December 2018 Nifty target at 11,500 (implied Sensex target of 37,000)," Deutsche Bank said in a research note adding the expectation of double-digit earnings growth forms the keystone of its positive view on the market in 2018.

The report further noted that rising prices of oil beyond the already elevated levels currently could be a key risk factor for India. But, the analysts are watching out for one number and that is earnings growth.

What will drive markets in the year 2018 is the earnings growth of India Inc. which should rise to double digits. History suggests that Nifty delivered a 12 percent annual return in rupee terms over the past five years despite a weak 4 percent corporate earnings CAGR. But, this is about to change, CLSA suggests in a note.

CLSA expects earnings to dramatically improve to a 15-20 percent CAGR over the next two years as corporate earnings return to normal with the bad news already priced in.

However, domestic and international liquidity factors have been quite favourable and the risk is on the downside. CLSA’s December 2018 Nifty target stands at 11,400 which offers a total return of around 10 percent, building in a 10 percent de-rating from the current multiple of 17.9x.

The Nifty currently trades at 17.9x one-year forward earnings and is 16 percent above the past five-year historical average. A strong improvement in earnings growth would be needed to deliver positive market returns, the global investment bank said.

Top nine stock which CLSA is betting on for the year 2018 includes companies like CG Consumer, Godrej Properties, HDFC, ICICI Bank, IndusInd Bank, L&T, Lupin, M&M, and NTPC.