Indian stocks have significant upside potential in the next 3-5 years and will probably outperform emerging markets given the country's 'superior macro environment', says a report. According to the report by Morgan Stanley Investment Management, valuations are not yet stretched and demand for equities from domestic households is expected to increase, while potential M&A activity may also drive the index higher.
"While the market appears to believe in a growth turn, it is far from pricing in a multi-year growth cycle, implying significant upside potential in the next 3-5 years," the report said, adding "the next few months may witness moderation in absolute returns and higher volatility, especially down the cap curve".
"India has underperformed emerging markets since April. So far, as the global bid on stocks is intact, Indian stocks will probably outperform given India's superior macro environment," it said.
The global brokerage major said investors should own Indian stocks, firstly because PM Modi's reelection is looking more and more likely, second growth cycle is turning and valuations are reasonable.
According to the report, "BJP continues to demonstrate the political astuteness needed to win the 2019 elections -- something that could trigger excitement in stocks". The report further noted that markets are entering a new growth cycle in which earnings could compound annually at about 20% for the coming five years.
Inflation, IIP data, Q1 earnings to be market movers this week
Trading sentiment in the stock market will be driven by announcement of key macroeconomic data such as inflation and industrial production as also quarterly earnings from blue-chips TCS and Infosys.
"After a smooth rollout of GST, market is expected to look forward to Q1 FY18 earnings, IIP, CPI, and WPI data," said Vinod Nair, Head of Research, Geojit Financial Services. TCS is scheduled to announce its quarterly earnings on July 13 and Infosys July 14.
"Results from early birds will start coming in this week. The week is also full of fresh economic data points," said V K Sharma, Head, Private Client Group at HDFC Securities. Industrial production data for May is due on Wednesday. On the same day, inflation based on CPI for June is scheduled to be announced. Wholesale price index (WPI) for June is due on Friday.
"Going ahead, market is likely to dance to the tune of several macroeconomic events like inflation and industrial production, which are due this week," said Abnish Kumar Sudhanshu, Director and Research Head, Amrapali Aadya Trading and Investments.