Sensex to touch 54,000 by 2018: 5 things to know

The benchmark index Sensex may touch 54,000 in 2018, according to a report by Bank of America and Merrill Lynch, a global investment bank. This is nearly double the current 28,000 levels for the Sensex.

India is the most preferred market by investors globally, as per the bank’s survey. Nearly 43% of the investors polled prefer India followed by China at 26%. This is despite the fact that India is considered only the second-best emerging market economy, next only to China.

Here are few things to know:

1. Investors overweight: “56% of the investors were overweight on India and only 7% underweight,” as per the survey. ‘Overweight’ is part of a three-tiered rating system.  Along with ‘underweight’ and ‘equal weight’, it is used by financial analysts to indicate a particular stock’s or country’s attractiveness. An overweight investor sentiment for India means that investors may prefer Indian equities to be a better value for money than the other emerging markets. This means we can expect more foreign investors to put their money in India. The banking sector, especially, could attract investors’ fancy. “Banks were expected to be the best performing sector, with 34% investors picking the sector. On the other hand, commodities and Autos were least likely to be the best performing sectors this year as per the investors,” the report stated.

2. Short-term outlook not too positive: While the long-term story for India is bullish, experts are wary about the short-term outlook for India. This is because economic recovery is expected to take some time. The government’s reform measures, while good for the economy, may take around a year to be implemented well and bear fruits. Most companies across industries complain that nothing has really changed on the ground yet in the ten months post the election. Unless the economic growth translates into corporate profits, stock markets may not rally in the short-term.

3. India preferred over other emerging economies: A clear majority in the May 2014 elections has given the government in India the power to push the reforms that have been planned. To this effect, the government has passed the legislation to hike Foreign Direct Investment in Insurance to 49% as against 26% that was allowed earlier. Opening up of the insurance sector for foreign investments is a step in the right direction for India. This is why India is preferred over other emerging market economies like Russia and Brazil. In fact, India has already surpassed Russia in terms of Gross Domestic Product (GDP) – a measure of the economy. It is expected to surpass Brazil soon too.

4. Roads, Railways and Defense spending: In the Union Budget for FY2015-16, the government paved the way for increased spending in the crucial sectors that drive growth like roads, railways and defence. This increased spending by the government will improve infrastructure. We are now planning to build 11 Kilometres of roads per day as compared to 2 Kilometres per day in 2013. Foreign Direct Investment in Defense has been increased to 49% from 26% earlier. This move will allow capital inflow into defense. An estimated $ 100 billion of orders are planned for the next five years in this sector. Railways – the lifeline of India and a prime infrastructure requirement – is also slated to see increased investment. Movement of material and finished products depends on the rail network. The Railway Ministry has planned capital expenditure of $ 138 billion over the next five years. This will be spent for the decongesting of the existing network and doubling of the railway tracks to connect more areas. All these plans put together can be the roadmap to recovery for India.

5. Rate cuts to help: The Consumer Price Index (CPI) Inflation has seen a drop from above 7% levels in July 2014 to the current rate of 5.3% in February 2015. This has allowed the Reserve Bank of India (RBI) to cut interest rates. More rate cuts are expected if the current rate of inflation persists. The RBI may cut rates in June 2015 by 0.25% and a total of 0.75% up to April 2016, as per the report. This will allow for banks and non-banking financial institutions to cut their lending rates on loans to the customers. A rate cut on loans, in turn, increases the demand for goods and services and thus stimulates economic growth.

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