Investing.com -- India's financial markets are expected to witness a rebound later this year, as per analysts at Bernstein.
Following a challenging start marked by high valuations, a rising equity risk premium, and earnings downgrades, recovery prospects appear increasingly favorable as broader macroeconomic and earnings trends stabilize.
The analysts note that a major part of the market downturn has been influenced by external factors, including a turbulent global macroeconomic backdrop under the Trump administration and weakening domestic and foreign investment flows.
Bernstein flags that while the current downturn persists, there are early signs of the earnings downgrade cycle bottoming out, particularly among large-cap stocks.
This development is setting the stage for a potential market recovery in the latter half of the year.
Key sectors such as Financials, Materials, and Consumer Discretionary are expected to lead the revival, supported by historically low long-term growth expectations, which create a relatively achievable benchmark for market performance over the next twelve months.
However, the path to recovery is not without its challenges. Bernstein identifies five critical risks: India's valuation metrics remain elevated compared to its historical averages and emerging market peers, the equity risk premium continues to rise, and expectations of aggressive interest rate cuts may not materialize as anticipated.
Additionally, domestic investment flows have moderated, and foreign investor interest, while improving, has yet to provide robust support.
Despite these challenges, the analysts recommend cautious optimism.
They advise investors to focus on sectors showing growth or recovery signs, such as Financials, Staples, and Energy, while avoiding sectors like Healthcare, Technology, and Real Estate, which face peak earnings pressure or ongoing downgrades.
Additionally, an emphasis on low-volatility stocks, which have been undervalued, is suggested as a pathway to capitalize on the anticipated recovery.