The market still has steam left to rise another 20 percent between now and March, feels S Nagnath, President and Chief Investment Officer, DSP Blackrock Investment Managers. The veteran fund manager sees increased infrastructure spending, policy reforms and a steady uptick in corporate earnings as being the key drivers over the next three years.
"I expect corporate earnings to grow 14-15 percent this year, and then 20 percent for each of the following two years," he said in an interview to moneycontrol.com.
Also read: Bull market may last for 5 years; harvest PSUs: Nirmal Jain
This is expected to lead to a re-rating of the Sensex price earning multiple from its historical average of 15.0-15.5 to 18-19 times.
"Once the market sees the consistency in earnings growth, there will be a re-rating of the Sensex multiple and you could see the index touching 40,000 over the next three years," Nagnath said.
"Market may have run up in the last few months, but we are still in the early stages of a bull market," he said.
Sentiment has improved dramatically since February this year, with benchmark indices gaining around 25 percent since then. Investor confidence has further strengthened with the NDA coming to power with a solid majority.
Food inflation is something that is worrying the market, feels Nagnath, while adding that it was not an insurmountable problem.
The Meteorological Department has forecast below normal monsoon for this year, which could hurt crop production and push up food prices. This in turn, will hold back the RBI from cutting interest rates, which many feel is crucial to the revival of the investment cycle.
Nagnath feels food inflation can be kept in check if the government uses its existing food stock well through well co-ordinated administrative measures.
Nagnath sees lot of fund raising, debt as well as equity, by corporate India in the days ahead.
"This will unleash the so-called animal spirits of India Inc; the moment you have one group raising money successfully, others will be encouraged to do the same and this could set off a chain reaction," he said.
Nagnath is bullish on the banking and capital goods sectors in particular, as these benefit the most when the economy is turning around.
He feels the non-performing asset (NPA) problem of the banking sector should ease with the improvement in the economy, as many stressed borrowers will then be able to repay their loans.
Nagnath is confident of increased foreign fund flows into India in the days ahead, as its economy is much better placed compared to large emerging markets like Brazil, Russia, China, and South Africa.
"Also, India has a much wider array of sectors to offer; you don't get such a wide choice in other markets," said Nagnath.
"This is not to say that all FIIs will be rushing to India tomorrow itself; but many of those who have been absent from India in the last few years will be returning," he said.
Nagnath is seeing signs of retail investors slowly returning to the market.
"In May, for the first time in years, we saw net new money come into equity schemes," he said, adding that the trend could pick up if market continues to deliver consistent returns.
Isn't there too much optimism in the market, with most market gurus talking about a multi-year and even multi-decade bull run? During the previous boom, there were few such predictions till about a couple of years into the bull run.
"The mood is much more upbeat than what it was last time around, but then this is also the first time in 30 years that a government has come to power with such a decisive majority," Nagnath said.
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