The benchmark equity indices finally look poised for new highs.
I believe that market sentiments are being driven not just by continued global liquidity but also shaping up of positives on the domestic macro front.
A much-needed silver-lining for our economy has come from strong export growth.
Our exports have clocked double-digit growth for three straight months supported by the depreciation of the Indian rupee coupled with recovery in advanced economies.
Given the 16-17% weightage of value-added exports in our economy, I believe that a continuation of this trend has the potential to raise our GDP growth by a massive 150-200 bps.
Also, driven by the improvement in exports and moderation in imports particularly gold, our CAD is expected to narrow thus alleviating our external vulnerability.
The anticipated boost from agricultural production is another positive catalyst for the economy because I believe it is likely to drive growth in the economy, push up disposable rural income and consumption and also moderate food inflation pressures.
Although food inflation is contributing substantially to the headline inflation prints at present, I believe it is likely to eventually cool off as harvesting progresses and new crop enters the market.
This would in turn provide the RBI with elbow room to ease interest rates going forward.
Put together, these factors along with a meaningful turnaround in the capex cycle are likely to take the economy back on high growth trajectory in the medium-term.
I expect that given the aspiration of growth amongst our demographics, any new government that comes to power would eventually focus on enabling structural reforms in the economy to remove supply-side bottlenecks and kick-start the investment cycle.
So, a recovery in big-ticket and new investments is likely post the elections.
I continue to have a positive outlook on export-oriented sectors like IT and pharmaceuticals.
I am positive on the metal sector as well considering recent capacity additions and meaningful under-utilised capacity in the sector that is likely to be employed for sharp increase in exports going forward.
Although expensive, defensives like FMCG sector are also likely to continue to outperform in the current environment.
In the banking space, I selectively prefer large private banks over a medium to long-term perspective.
Aided by these positive developments and attributing a 15 times multiple to our Sensex EPS (in line with the 5-year average), we arrive at a Sensex target of 22,600 in the coming months.
Beyond this, I believe that markets are likely to at least give returns in line with the expected 13-15% earnings growth.
(Views are personal)