Momentum is gathering strength for Indian shares to make another dash to all-time highs, bolstered by optimism about the economy and earnings outlook in the new year. Cash-flush fund managers are betting shares of companies whose revenues come from domestic consumption or are driven by government spending will do well.

After the market closed on Friday, Standard & Poor’s maintained its sovereign rating for India at the lowest investment grade, much to the chagrin of New Delhi and belying market expectations, a week after rival Moody’s upgraded the country. S&P’s said “sizeable fiscal deficits, a high net general government debt burden, and low per capita income” remained as concerns even as it lauded reforms undertaken by the government.

Still, the rating agency was upbeat about India’s outlook. “Despite two quarters of weaker-than-expected growth, India’s economy is forecast to grow robustly in 2018-2020 and foreign exchange reserves will continue to rise,” it said in a statement.

“The medium-term outlook for growth remains favourable, based on private consumption, an ambitious public infrastructure investment program, and a bank restructuring plan that should help revive investment.”

“Upward pressure on the ratings could build if the government’s reforms markedly improve its net general government fiscal out-turns and so reduce the level of net general government debt. Upward pressure could also build if India’s external accounts strengthen significantly.”

Equity strategist V. Venugopal said the markets were unlikely to be affected by S&P’s, which had always been conservative in its ratings, as investors were more interested in the higher returns that were on offer in equities.

“We’re at the dawn of an upturn in the earnings cycle,” he said. “This provides a powerful engine to sustain the stocks rally.”

The 50-share Nifty, which is mimicked by portfolio managers, climbed for seven successive trading days in the longest winning streak in almost 2-1/2 years, indicating strong support for the market. The benchmark closed at 10,389.70, up 1 per cent over the week, and within sight of its all-time high of 10,490.45 reached on November 6.

The top-30 Sensex also gained 1 per cent over the week to 33,679.24, not far from its record peak of 33,865.95 set on November 7.

Housing, infrastructure

Christopher Wood, chief equity strategist at CLSA, wants investors to focus on the long-term benefits and ignore the short-term noise. In his Greed and Fear Report, he said the problems with the Goods and Services Tax would be sorted out in the next six to 12 months and Prime Minister Narendra Modi is likely to drive job creation in the remaining months of his term.

Housing and infrastructure sector will drive economic activity in India for the next 18 months, he said, even if private sector investment remains lukewarm.

“Affordable housing in India remains one of the most straightforward bull stories in Asian equities,” the report said. “However, a pick up on the ground in affordable housing may not become really visible till late 2018.”

Investors should look to buy any pullback in stocks geared to affordable housing, he said, confident that a ramp up in spending was coming.

Wood also wrote he expected Modi’s Bharatiya Janata Party to ride tougher challenges and win the provincial elections in Gujarat, but with a reduced number of seats than in the previous polls. The two-phase voting in the western state, where Modi was chief minister for 22 years before he moved to New Delhi in 2014, is scheduled on December 9 and 14, and results are due on December 18.

Consumption plays

Shares of companies whose revenues come from domestic consumption or are driven by government spending are on the top of the buy-list of fund managers who believe the raging bull run has strong legs.

“The sectors which we are really bullish on are infrastructure-related and capital goods because those are really cheap in terms of where they are on the earning cycle,” Jyotivardhan Jaipuria, managing director of Veda Investment Managers, told ET Now television channel.

“There is a lot of capacity sitting there, demand has been very weak and there is a huge operating leverage once demand starts to pick up. Most of it is coming from the government and we are not very optimistic on the private sector capex for the next 18 months at least.”

He is also upbeat on rural demand and has increased exposure to tractors, agro chemicals and other items that are consumed in the hinterland. Stocks in these sectors are pricey, but improved earnings in the coming years should help.

Earnings outlook

“Some of the disappointment on earnings growth over the last three or four years is now behind us,” Prashant Sharma, chief investment officer at Aviva Life Insurance Company India Ltd, told ET Now on the outlook for the corporate sector.

“We do expect from the next half of this financial year and next couple of years, the earnings growth should start picking up quite significantly.”

He forecast earnings growth of 15-20 per cent over the next two financial years from an expected 10 per cent rise in the current year that ends next March.

“While valuations are expensive, the earnings growth is just about beginning. Given that kind of a backdrop, while equity markets are expensive, we do not rule out a correction which should be used as a buying opportunity,” he said.

Global investment bank Goldman Sachs forecast the operating income of energy conglomerate Reliance Industries Ltd, controlled by India’s richest man, Mukesh Ambani, to double in the next three years as its Jio mobile services ramp up revenues.

The company, whose main activities are petrochemicals and refining, is likely to report operating income — earnings before interest, taxes, depreciation and amortisation — of $14 billion in the financial year ending March 2020, compared with $7 billion in 2016-17, Goldman said in a report.

“Jio, which will start contributing from the next financial year, will be key for earnings growth beyond March 2020,” it added.

The brokerage raised its target price on Reliance shares to Rs. 1,205 from Rs. 920.85, implying a potential upside of almost 27 per cent from Friday’s close of Rs. 949.50. It also added the stock to its Conviction List, a roll call of top recommendations.

“Volume-led growth with capex cycle completion, refining margins to outperform peers and telecom business to start contributing positively are the key positives,” Goldman said.

—The writer is a journalist based in India