Nifty may rally 20 pc over the next 12 months: RBS

MUMBAI: Beaten-down Indian stocks and low investor expectations on the policy front may the right blend for equities to rally as much as 20% with financials in the lead, strategist at the Royal Bank Scotland said.

“We feel there is absolute and relative upside; equities are going to turn 20% plus over the next 12 months,’’ said Parul J Saini, the Singapore-based India strategist for RBS. “We are still expecting 5800 Nifty by the end of year. It would, of course, be hostage to global develpments.”

RBS is joining others such as Morgan Stanley in calling equities as the right investment after a deep sell-off that made India the worst performer in Asia due to rising interest rates and high prices. That has led to many stocks getting inexpensive, with most of the trading at about 12-13 their future price-to-earnings multiple. The BSE Sensex is down 17% this year, compared with MSCI Emerging Market’s 18% fall.

“Investor expectations on any policy actions are very low. So, if you have anything positive happening it will be good for the market,’’ he said. ``Simple easy non-legislative steps, like rationing the usage of crude products, and our analyst believes that oil marketing companies are capable of doing it. It’s always good investing when expectations are low.”

While most equity strategists are cautioning against rising bad loans of the banking sector, Saini is betting big on some of the PSU banks which are trading at a multi-year low valuations with some of them at less than one time their book value.

“Beaten-down PSU banks like Union Bank, Canara Bank and SBI, and Reliance, ONGC and Cairn India are looking quite good,” he said. “If you think equity can give 15-20% then you must have names that have been degraded.”

The BSE Bankex is one of the worst performers this year with the index falling 14% as investors fear rising interest rates could increase default. Global investors are positive about India, he said. “The consensus on India is quite negative. In Europe, people are a bit more positive,” said Saini.

Of course, if Europe blows out into a full crisis, the Indian market could be impacted, but it would still be lesser than what it was in 2008 as the composition of funds have changed significantly.

While the FII exposure is quite the same as 2007-08, the composition of money has changed significantly. Hedge funds hold much lower amounts - P-notes were 38% of total FII exposure in 2008 and is now less than 11%. Anecdotal evidence suggests there is more long-term money,” Saini said. “We’ve held discussions with some European pensions funds who have not had any exposure to India yet and looking to take it up,” he said.