Global brokerage Credit Suisse is "cautiously optimistic" on Indian equities, but added that it does not expect any major and prolonged correction in stocks this year.
The global financial services major said though it is enthused by the reform momentum in the country, the fiscal crunch, several state elections, earning downgrades and high valuations make it "nervous".
The report authored by Jitendra Gohil, Head of India Equity Research at Credit Suisse however noted that any sharp and prolonged correction in Indian equities is ruled out owing to robust domestic flows and a solid global growth outlook.
"The ongoing reforms have not only put India on the top of investors' radar but also lifted India's long-term growth potential, in our view," the report said adding that "given an unexciting outlook for other asset classes, we remain cautiously optimistic on Indian equities".
The report further noted that considering a benign outlook for investments in gold and real estate, coupled with changing investments and spending patterns of the millennials, equity mutual fund flows are expected to remain elevated.
Within equities, Credit Suisse remained 'overweight' on consumption-related stocks, especially discretionary items with a rural focus and the energy sector, given a firm oil price environment and favourable government policies to support the sector.
"Amid high valuations and a volatile macro environment, we recommend investors to focus on long-term structural themes that have been shaping up in India," it said.
The report said while the recent reform initiatives like GST and demonetisation could potentially push India's GDP growth structurally on the higher path, the drag from these reforms, although fading, is here to stay for some more time.
Around 45% of India's GDP and 85-90% of employment come from the unorganised plus agriculture sectors, which are under severe distress and will recover gradually, leading to below potential growth in 2018, it added.
