NEW DELHI: Global brokerage Bank of America Merrill Lynch today said positive global cues have lifted Indian equities this year but returns may be muted from here on as it set a Sensex target of 29,000 for December this year.
Indian equities have rallied 9 per cent so far this year and around 13 per cent from the demonetisation lows, in line with other global indices like MSCI Emerging Market index which has rallied 9.7 per cent so far this year and MSCI World index which registered 5.7 per cent rise in the period under consideration.
According to BofAML's global emerging market (GEM) strategists Ajay Kapur and Ritesh Samadhiya, from near panic levels in late 2016, global equities are now entering 'euphoric' zone and may take a breather.
"In India, while we expect longer term business cycle to improve in next 2-3 years, we see near-term returns capped from here on, due to possible near-term reversal of global wave, residual impact of globalisation, rich valuations and continued risks of earnings downgrades," BofAML said in a research note. It further added, "while momentum for equity markets is strong, our December 2017 Sensex target for 29,000 leaves little upside room."
Moreover, the rollout of GST in the second quarter of 2017-18 could further bring earnings uncertainty, putting pressure on the markets. The report further noted that while the markets have weathered demonetisation, earnings have not, especially in the consumer discretionary sector.
Consumer discretionary sector includes non-essential items for consumers like apparel, leisure and entertainment, and durable goods. Sector-wise, the brokerage is 'overweight' on financials, staples and cement, and 'underweight' on IT/discretionary.
Regarding valuations, BofAML said that it is no longer cheap and risks of downgrades exist. "The recent sharp rally has taken the market again into expensive territory," it said. The 30-share sensitive index Sensex is currently hovering around 28,945 points.