As Indian markets remain steady and resilient despite a brutal second wave and consequent localised lockdowns, Morgan Stanley is optimistic that there are more legs to the rally. The global brokerage firm has reiterated its target of 55000 for the Sensex to hit by December-end assuming stability in the current virus situation and a recovery in the economy.
“This level implies that the BSE Sensex would trade at a forward PE multiple of 17.5 times and a trailing price to earnings (PE) of 21.2, ahead of the 25-year average of 19.7 times. This premium over the historical average reflects a higher confidence in the medium-term growth cycle in India,” it said in a note on 17 May. Morgan Stanley expects Sensex earnings to rise 32% in FY2022 in this scenario.
In a bull case scenario, Morgan Stanley estimates the Sensex to hit 61000 if the virus ebbs completely, recovery in growth is sustained, and global stimulus supports asset prices. If this forecast pans out then the government will deliver strong policy including infrastructure creation, ease of doing business and fiscal consolidation. “The US dollar enters a sustained bear market, accelerating flows into EM including India. Earnings growth reaches 37% in FY2022,” Morgan Stanley said about a bull case scenario.
However, there are warnings too. The Sensex has possibilities to sink to even 41,000 if the bad virus lingers well into second half of 2021, and growth falters. In this case India will fail to deliver an adequate policy response, leading to losses in the financial system while Sensex earnings may grow 28% in FY2022 but equity multiples will de-rate to reflect poor macro conditions.
On Tuesday, benchmark Sensex closed above the 50,000-mark for first time in nearly two months while the Nifty also ended at 15000-mark. The BSE Sensex rose 612.60 points or 1.24% to close at 50,193.33. The Nifty was up 184.95 points or 1.24% at 15,108.10. In the last two days, investor wealth swelled by ₹5.78 trillion.
“The market’s ongoing consolidation is improving its return prospects going into second half of 2021 albeit the immediate triggers pertain to the pace of the likely deceleration of the second covid wave and improvement in vaccine supply. Our leading indicators relating to fundamentals both macro and corporate earnings are generally positive about equity returns,” Morgan Stanley said.
The challenge for stocks comes from waning liquidity and valuation support. With accelerating earnings and reasonable relative valuations, trailing underperformance and strong policy traction, India seems set to beat emerging markets, reiterated.
“We are looking for acceleration in the large-cap index return in the coming months and for India to outperform emerging markets,” it added.
According to Morgan Stanley India is stock-picker’s market, with ample alpha opportunity underscored by falling correlation of returns across stocks. Its pecking order is domestic cyclicals, rate sensitives, global cyclicals, defensives exporters and mid-caps, large caps, small caps.
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