Indian equity market shows signs of recovery, says Kotak Mahindra Bank

Talk of 'green shoots of recovery' in India is not premature, according to Alroy Lobo, chief strategist and global head of equities asset management at Kotak Mahindra Bank.

Lobo believes sentiment has improved and liquidity is returning to the market, despite uncertainty over corporate earnings and the outcome of the Indian elections.

Lobo expects valuations in the equity markets to improve and believes that valuations are now closer to the mid-point of a range which the market has traded historically, although for the market to take off there will need to be very clear signs of earnings being upgraded significantly. Addressing speculation that recent gains in the Indian equity markets have been the result of a bear market rally, Lobo forecasts a sustained recovery and believes fiscal stimulus, softer commodity prices, lower lending rates and monetary easing by the RBI should help support earnings.

He cites the changing shift in global sentiment over the past three to four months to be a key factor in this recovery, along with return of risk appetite. Lobo believes the main issues behind the economic crisis such as liquidity have been addressed and are improving. Furthermore, he believes there is increasing confidence that the government and central banks will work together to help prevent they type of solvency issues seen elsewhere.

He says: 'We need to see a consolidation at the current market levels in order for investors to believe this improvement is for real. However, the economy has started responding to the stimulus measures taken by the government, and providing there is no further global shock, markets should pull back and resume healthier trading. The results of the general election could change this scenario, particularly for mid caps over the short term, as could the monsoons which have a bearing on agricultural output, a sector which makes up 17 per cent of India's GDP.

However, the cooling off of commodity prices should positively impact Indian businesses, and as we enter the company results reporting season, we could see earnings surpass expectations.'We expect lending rates to soften in the second half of this year which will also benefit companies, and moving into 2010, we forecast GDP growth of 5.5 per cent. Going forward we expect large caps to bear the first fruits of a steady recovery, and our portfolio is weighted to take advantage of that growth.'