BofA-ML's 2013 growth expectation is in contrast to the 25 per cent return the Sensex has witnessed year-to-date.
"India was one of the worst-performing markets globally last year and expectations were low. But YTD, it has been one of the best-performing markets globally despite downgrades in the economy and earnings. Unfortunately, India will enter 2013 as one of the best-performing markets and expectations now are high," BofA-ML said in its report.
BofA-ML says markets will be helped by the 3 Rs - recovery in earnings and economy, rate cuts and reforms. However, the 3Ps - politics, performance and positioning- will act as headwinds in the next calendar year, the investment bank says.
BofA-ML expects India's GDP growth to recover to 6.5 per cent in FY14 from 5.5 per cent in FY13, mainly due to a pick-up in consumption. Discounting further earnings downgrades in 2013, BofA-ML expects earnings to recover from 7 per cent in FY13 to 12-14 per cent in FY14.
It expects RBI to cut rates by 100-125 basis points as inflation stabilizes and the focus shifts to reviving growth. It expects accelerated reforms and high investor expectations until February 2013.
On the flip side, reforms could get tougher in second half of current 2013 as the country gets into “election mode,” the investment bank says.
Flows to secondary markets could ease over next few months as global emerging markets funds now have their highest weight in India in six years, BofA-ML said.
Strategy: Overweight rate-sensitive sectors like autos, financials, real estate, telecom and pharma.
Top Buys: DLF, ICICI Bank, Maruti, Lupin
Top Underperforms: HUL, Hero MotoCorp, NTPC
Top Midcap Buys: Havells, Motherson Sumi, Yes Bank, BEL, Glenmark