MUMBAI: Goldman Sachs expects the Nifty to rise nearly 17% to 7600 in a year bolstered by an improving economy, a rebound in corporate earnings and bullish foreign investors eager to lap up beaten-down cyclical stocks The US brokerage also increased India to ‘overweight’ from ‘market weight’ in a report dated March 14 and added that elections have been an important catalyst for markets in the past. Goldman becomes the latest major foreign brokerage to increase India’s rating after BNP Paribas’ similar upgrade in February.The Nifty has rallied 23% from its August 2013 lows on the back of a stable rupee, a falling current account deficit and expectations of the Narendra Modi-led BJP and its allies forming a government at the Centre after the May elections. So far this year, the Nifty has climbed 3%, brushing aside worries over the impact of tapering and an emerging market crisis caused by Chinese loan defaults and Russian military intransigence.Goldman says elections have always been an important catalyst for markets and they could have a bearing on policy choices and the progress of structural reforms. “History suggests that equities in both India and Indonesia tend to have a cyclical rally leading up to elections, partly supported by favorable foreign inflows,” the report said. “Our analysis of market moves, valuation changes and FII flows around previous elections suggests India may have more room for a pre-election rally than Indonesia.”

The firm has included Larsen & Toubro, Tata Motors, Tech Mahindra, BPCL, and IndusInd Bank in its Asia-Pacific conviction list and believes that ONGC, NTPC, ICICI Bank, Coal India are “election beneficiaries” — that is they will benefit from the policies of a new government.

The firm favours cyclicals over defensives and has maintained its ‘overweight’ stance in infotech and energy sectors, while upgrading autos.India’s economy is limping along and industrial investment is sluggish but the currency has been remarkably stable in the past six months and the current account deficit, the major cause of the June-August 2013 crisis, has plunged, government data shows.Goldman expects the deficit to fall below 2% in FY14 from 4.8% in FY13 gradually pick up in the second quarter after bottoming out in the first. The brokerage expects 12% earnings growth for 2014, and 17% for 2015, with high 16-20% return on equity (ROEs) compared to low-teens for the rest of the region.The valuations for India still remain near their long-term historical average at 14.2 times forward P/E, while valuations for domestic cyclical sectors remain inexpensive compared to historical average.“The ongoing India’s cyclical macro adjustments has reduced its external vulnerability, thus relieving pressure on the current account, increasing forex reserves, and stabilising currency,” said Timothy Moe, chief Asia Pacific regional equity strategist at Goldman Sachs in the note. Goldman was among the few brokerages to write about the market’s enthusiasm for Narendra Modi in October last year, an effort that earned it a rap on the knuckles from commerce minister Anand Sharma.This time, the report talks about the rising popularity of Modi and the BJP without delving into analysis of election outcomes.But it notes that volatility in Nifty options trading has reduced in recent weeks and that the markets are no longer pricing in the May elections as a binary event with the high possibility of large movements one way or the other.“On the other hand, the underlying equity market hasn’t rallied too much and valuations look fair. Thus, equities could potentially see a ‘catch-up’ to the options market.”Meanwhile, RBS, a leading UK-based fund house said that based on historical average of 12 month-forward price earnings (P/E) multiples of about 14.2 times, Nifty could rise to 7,100 levels.“It’s no good waiting for good news on Indian elections to come to fruition before buying equities; they historically have priced in gains of 17% and 30%, respectively, three and six months ahead of parliamentary elections.This year, hopes are high and the political mandate is there for decisive economic and market reforms,” said Rajesh Cheruvu, chief investment officer at RBS India, in a note.