Indian stock market outlook solid but gains to slow on economic woes: Poll

Indianstocks are set to rise further over the coming year but will lag predictions from three months ago on worries shares have become too pricey and that the economy is headed for a rough patch, aReuterspollshowed.

The BSE Sensex, already up over 18 per cent this year, is forecast to add another 3 per cent by end-2017 to 32,500 from Tuesday's close of 31,497, according to thepollof 50 strategists taken over the past week.

If realised, that would mark its best calendar year performance in percentage terms since 2014. The latest predictions were lower than the 33,000 - which would be a record - forecast in the June poll. The existing record high, struck in August, is 32,686.

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WhileIndianshares have been among the star global performers this year, the domestic economy has beenslowing since the middle of 2016. The latest data showedeconomicgrowth cooled to a three-year low in the quarter through to June.

That unexpectedslowdown, which was reported in August, prompted foreign investors to pull cash out of India and triggered two consecutive down months in the Sensex for the first time since early 2016.

Still, the average price-to-earnings ratio of 23 on the BSE Sensex is at a 17-year high, suggesting stockprices are stretched.

"Valuations are very rich and even the liquidity flow from FIIs (Foreign Institutional Investments) is now drying up," said B.V. Rudramurthy, managing director at Vachana Investments.

About 60 per cent of respondents said the index was overvalued.

The remaindersdon't thinkIndianshares are overvalued now, though they expect it will be so if furthergainswere made as predicted in the latestReuterspollby end-2018.

"Thestockmarkethas been optimistic about an eventual corporate earnings recovery, justifying the valuations. That is the single biggest risk," said Ajay Bagga, executive chairman at OPC Asset Solutions.

The Sensex was forecast to rise to a record high of 34,000 by the middle of next year and then to 35,000 by end-2018.

The biggest risks to those forecasts were the persistent weakness ineconomicactivity and lower-than-expected corporate earnings, according to analysts.

The government's decision late last year to ban high-value currency notes took over 85 percent of cash out of circulation, a demonetisation drive that has hurt consumer spending and businesses.

That, along with a push this year in July to unify various state-level taxes into one national goods and services tax, has disrupted business and cast a shadow overeconomicactivity.

"Economicactivity has to pick up for corporate (profit) growth as there is unutilised capacity. But too many harsh reforms have impacted growth at a time when themarketis overvalued," said A.K. Prabhakar, head of research at IDBI Capital.

"Still, there is no major avenue to invest post demonetisation. The idle cash which has come into the system is likely to keepmarkets elevated."