With the euphoria of 2003 spilling into 2004, the markets expect this year to go one better.

The strong growth in corporate earnings and solid economic fundamentals have set the backdrop for a good year. Topping it is the anticipated jump in retail participation in equity, apart from expectations of a further surge in portfolio flows.

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Market analysts expect returns from the stock markets to be attractive despite the high base on which it will be growing this year.

"We are positive on the equity market outlook for 2004. We expect markets to give a return of 15-20 per cent during the year for various reasons, including sustained strong economic growth, strong corporate earnings and acceleration of reforms, among other factors," says Jyoti Jaipuria, head of research at DSP Merrill Lynch.

Marketmen are certain that commodities will drive the overall economic growth in the country.

"Industrial commodities such as cement, steel and non-ferrous metals, among others, will be heavily in demand from the infrastructure sector," says Ketan Jhaveri, director, SB Securities.

Bharat Shah, CEO and managing partner, ASK Raymond James Investment Management, points out: "Infrastructure is not a one-year growth story. It is sustainable over a period of at least a decade, which will continue to contribute to the strong economic growth."

Moreover, foreign institutional investors will continue to look for countries where growth is domestically driven. Continuing weakness in the dollar could lead central banks in Asia to pump in more domestic liquidity as they sterilise dollar flows.

The sustained liquidity will help drive domestic demand. In this regard, India stands out as one of the best domestic demand plays, stock market experts say.

India has seen FII flows over $7.65 billion in 2003. While the markets are no longer inexpensive, India is favoured owing to its domestic economy (exports are just 10 per cent of GDP) and strong economic and corporate growth rates.

From an FII perspective, India remains one of the biggest overweight markets for global equity market funds. Thus FII flows to India will be driven by increased flows to emerging markets as well as new money from non-emerging market funds.

"On a relative basis, Indian markets continue to be attractive on a long-term perspective and this, combined with the broad-based investible universe of shares, is likely to help sustain FII inflows," says R Sukumar, senior vice-president and chief investment officer, equity, at Franklin Templeton Investments.

Given the strong growth in the economy, with GDP growing 8.4 per cent in the September quarter, most companies expect to see strong demand growth.

Coupled with sustained cost reduction efforts, large corporates should be posting at least a 20 per cent growth in earnings (year-on-year).

"We think earnings growth, rather than a valuation re-rating, will drive stock prices in 2004," says Jaipuria.

The only fly in the ointment could be the E-factor -- the elections due later this year. The elections could be brought forward if the BJP thinks its chances will be better now rather than later. But marketmen are not losing any sleep over it.

"India has learned to live with coalition governments for the last five years, so political permutations and combinations in power at the Centre have already been discounted," says the CEO of another brokerage house.

Analysts expect to see an acceleration of reforms post-elections - which will give the markets a further boost. Typically, the markets have rallied immediately after most of the last six elections.