JPMorgan sees Nifty50 at Mt 10K by 2017, says good time to buy on dips

NEW DELHI: JPMorgan has projected the Nifty50 to touch the 10,000 mark in 2017. In a note released after RBI money policy, the global brokerage said the Nifty50 has gone past its base case target of 8,600 for calendar 2016 set in January and is on track to surge past the 9,500.

The global investment bank sees 12-15 per cent return from current level and long-term investors should now look at buying stocks on dips. The returns are expected to be driven primarily by earnings growth.

The local events calendar over the near term suggests positive news could thin out over this period. Consequently, it said it does not rule out a phase of consolidation, either in terms of time or value, in the near term.

“We maintain our view that we are at the cusp of a recovery in the earnings cycle. An early cycle the recovery is being driven by an improvement in operating profit margins,” the global investment bank said in a note.

“We expect this to be followed by lower financing costs – market lending rates have corrected by more than 50 bps over the last quarter. There is scope for better transmission of past rate cuts into the second half of FY17 and further rate cuts of at least 25 bps are expected in the second half of the financial year,” it said.

The 25 per cent rally seen in the market since the February lows has been driven by a bunching up of good news, such as global risk on sentiment, forecasts of a normal monsoon, the GST legislation being passed, a sharp 40-50 bps decline in bond yields as the RBI started implementing its changed liquidity stance, from deficit to neutral and expectations of rate cuts.

The Reserve Bank of India (RBI) on expected lines delivered a 25 bps rate cut, which was in line with expectations. One significant policy measure which was disclosed by RBI was the treatment of “S4A” loans on the books of banks.

S4A is the Scheme for Sustainable Structuring of Stressed Assets which allows banks to take haircuts on the exposure to corporates that are viable but are overleveraged so the level of debt comes down to a level that the borrower can support.

The RBI will allow banks to treat the “sustainable” portion of the debt as standard, which could potentially lead to a substantial reduction in headline NPLs and help improve margins as interest can be accrued on that portion of the debt.

“This could down the line be a positive for the high NPL banks (PSUs/ICICI/Axis). S4A implementation, however, has been challenging for the banks because of the substantial haircuts needed which bank managements are reluctant to take,” the global investment bank said.