Indian shares are expected to extend their rally and gain almost 5 percent by year-end, spurred by optimism that fiscal and economic reforms show the government is determined to mend the economy and regain the confidence of foreign investors.
But after an almost 21 percent rise so far this year, the Indian stock market is not cheap. A sharp domestic slowdown, and uncertainty about the global economy could prevent Indian shares from rising much higher.
The 30-share BSE index will rise to 19,500 points by the end of 2012, according to the median forecast from a survey of 20 investment houses conducted over the past week, and then rise further to 20,400 by the middle of next year. End-year projections for the SENSEX index which closed on Wednesday at 18,632.17 points, ranged from 17,000 to 20,500.
The new end-year forecast is higher than the 18,750 points expected in the June poll, but that is partly a reflection of how much the market has rallied since then. Back then, the government's ability to pass reforms was in doubt and India was facing the threat of a sovereign ratings downgrade and sharply slowing economic growth. But now, analysts are more optimistic.
"Expectation of a reform juggernaut to rev up growth is likely to keep markets on a roll," said Vivek Mahajan, head of research at Aditya Birla Money, a securities firm. Mahajan expects about a 4 percent rally by December, like many others. The forecasts are upbeat even though India's main index is already Asia's second-best performing index this year, beaten only by Thailand's SETI, and is on course to rack up its biggest year of gains since 2009.
Despite a strong January, the performance of Indian shares had fizzled out by May as economic growth slowed to below 6 percent, well under the near-double-digit clip in the mid-2000s.
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