BNP Paribas expects the Sensex to hit 50,500 by the end of 2021 as the research firm retains an “overweight” rating on India, citing persistence from market leaders and quality supplies.
India continues to benefit from two phenomena – large stocks are growing and the availability of quality stocks in relative abundance compared to its Asian counterparts, BNP Paribas said in a note. The research firm’s goal for the Sensex implies a higher potential of 10% of its current level.
“We continue to focus on quality and market leaders in India,” said Manishi Raychaudhuri, head of Asia-Pacific equity research at the firm, in the note. “Consumer stocks benefiting from domestic rural demand and service exporters benefiting from a revival of global agreement must continue to dominate the investment landscape.” Raychaudhuri also expects private banks and insurance companies to continue to benefit from market share gains.
Indian stocks tracked their global counterparts in the worst sell-off since 2008 after the coronavirus outbreak. But since then they have eliminated losses, based on the optimism of a faster-than-expected economic recovery, a possible Covid-19 vaccine and foreign inflows, to trade positively for the year and raise new highs. The rally even prompted Morgan Stanley to increase its target for the Sensex to 50,000 by the end of next year, citing that “the next growth cycle is not fully priced.” The Sensex recovered more than 20,000 points from its 52-week low of 25,638 hits on 24 March. The 30-share gauge is currently trading at a price-to-earnings ratio of 33.36 times.
“Compared to China, India has had a relatively late impact of the Covid-19 boom and is experiencing a corresponding late recovery. In fact, the recovery, although visible in some segments of the economy, is absent at urban consumption or the active quality of banks,” he said. BNP Paribas.
Raychaudhuri expects reforms such as the proposed changes to the agricultural marketing laws, changes in labor laws and the production-linked stimulus plan offered to 10 sectors to have a long-term impact.
- Most high-frequency indicators such as auto sales, steel and cement consumption are more or less higher than pre-hidden levels.
- In some pockets of free consumption such as passenger vehicles, reactions from manufacturers indicate not only stock replenishment, but also a genuine increase.
- Strong expansion in an area under summer crop cultivation aided by a well-spread monsoon was a major driver of rural income.
However, BNP Paribas has expressed concerns about India’s recovery growth due to a delay in municipal spending, high inflation and quality of bank balance sheets.
“The concerns stem, in our view, from still weakening municipal revenues, persistent high inflation and the questionable quality of banks’ balance sheets, especially the risks they could face from their retail loan basket, ”Raychaudhuri said in the note.
The Covid-related disruptions, according to the note, had a much more pronounced impact on urban employment destruction and revenue. “The subsequent decline in urban propensity to consume non-essentials is not surprising, but worrying nonetheless.”
BNP Paribas has also highlighted high inflation as a concern, although it does not expect the Reserve Bank of India to raise interest rates. “The resulting likely moderation in headline CPI inflation should give the RBI some respite, but overall inflation and its impact on monetary policy is an area we will be keenly looking at.”