Mumbai: Even as stock markets continue to scale lifetime highs, top investment banks have begun revising upwards their targets for the benchmark indices.

Not only are they betting on an economic recovery and endorsing the recent reform initiatives undertaken by the Union government, they are also signalling that the best for the markets is yet to come.

Goldman Sachs Group Inc. and Citigroup Inc. have raised their targets citing the bank recapitalisation programme, infrastructure push and continued inflow of domestic savings into equities. They believe these factors more than offset concerns on valuation and poor earnings growth and are sufficient to propel the Sensex and Nifty to newer highs in 2018.

In a 29 October note, Citigroup said it expects the Sensex to reach 33,800 in March 2018 from an earlier target of 32,200; it also reduced its fiscal 2018 earnings per share (EPS) growth target for Sensex firms to 13% from 17-18% at the start of the year.

“While earnings disappointments/downgrades continue, the Street should be more optimistic on recovery post the big government push" in the form of bank recapitalisation, infrastructure blueprint and increases in minimum support prices, wrote Citigroup analysts.

Last week, the government announced that it would infuse Rs2.11 trillion into state-owned banks over this year and the next through various means. It also announced Rs6.92 trillion in investments in road construction projects over the next five years and raised the minimum support price for wheat. These measures are expected to boost bank credit growth, which is hovering at single-digit levels, and boost economic output. Markets have been rising since then and on Monday, both the Sensex and Nifty closed at new highs. The Sensex rose 0.33% to 33,266.16 points; the Nifty gained 0.39% to 10,363.65 points.

Goldman Sachs has also increased its end-2018 Nifty target to 11,600 points, up from a September 2018 target of 10,900 points, and reiterated its “overweight" stance on India, citing the impact of bank recapitalisation.

Goldman analysts are more optimistic about a corporate earnings recovery, which they have forecast to happen as early as the second half of the current financial year as the adverse impact of the transition to the goods and services tax (GST) wanes.

“Re-rating of GDP growth expectations and removal of ‘left-tail’ risk in the banking sector should support India’s price-to-equity premium relative to the rest of the region," they wrote in a 26 October note. Goldman added that past bank recapitalisation episodes suggest that markets perform strongly as credit growth picks up and macro recovery gathers pace.

High valuations amid weak earnings growth have resulted in foreign investors selling Indian stocks for a couple of months now. In October, foreign institutional investors (FIIs) sold Indian equities worth Rs5,271.92 crore while local insurance and mutual fund companies bought Rs9,354.31 crore worth of shares.

According to Citigroup, in the absence of attractive alternatives, domestic flows could be sustained and the government’s reform agenda and gross domestic product (GDP) growth recovery should also turn FII sentiment incrementally positive.

Citigroup analysts, however, warned their earnings growth forecast for the current fiscal might be slashed further. Bloomberg data shows Sensex firms’ consensus EPS forecast for the current fiscal has been slashed by 10.69% since April and by 5.2% for the next year.

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