Hold on to your positions as the S&P BSE Sensex which reclaimed 50,000 on Tuesday is set to hit fresh record highs by December 2021. In a bull case scenario, the index could move upwards of 61000, Morgan Stanley said in a strategy note.
The index is still 4 percent shy of surpassing its previous record highs of 52,516 registered in February 2021.
India is a stock pickers market with ample alpha opportunity. The ongoing consolidation has only improved the return prospects going into H2 2021 which will help India beat Emerging Markets (EMs), wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi and Nayant Parekh.
The immediate triggers pertain to the pace of the likely deceleration of the second COVID-19 wave and improvement in vaccine supply. The global investment bank prefers domestic cyclical, rate sensitives, global cyclical, defensives exporters. In terms of categories, they prefer midcaps, largecaps, and smallcaps in that order.
Morgan Stanley’s leading indicators relating to fundamentals both macro and corporate earnings are generally positive about equity returns.
“The challenge for stocks comes from waning liquidity and valuation support, but with accelerating earnings and reasonable relative valuations, trailing underperformance and strong policy traction, India seems set to beat (other) EMs,” the note added.
The global investment bank is looking for acceleration in the largecap index return in the coming months and for India to outperform EMs. The base case target for Sensex remains unchanged at 55,000 which implies an upside potential of 10% to December 2021.
The base case target for which Morgan Stanley places a 50 percent probability assumes stability in the current virus situation and a recovery in the economy per our forecasts.
“We expect Sensex earnings to rise 32% in F2022. The government is not required to launch a fresh fiscal program thanks to the ongoing recovery in the economy, but continues to pursue both administrative and legislative reforms,” said the note.
In a bull case scenario, for which the global investment bank places a 30 percent probability, Sensex can move up to 61000 levels assuming the virus ebbs completely, recovery in growth is sustained, and global stimulus supports asset prices.
“The government delivers 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 F2022,” it said.
Portfolio Strategy:
Morgan Stanley in the note highlighted that their pecking order is domestic cyclical, followed by rate sensitives, global cyclical, defensives exporters and mid-caps, large caps, and small caps.
The global investment bank increased weightage in Consumer Discretionary, Industrials, Financials, and Utilities.
Consumer Discretionary (+500bp):
Valuations look attractive and with real rates likely to be in negative territory through 2021, Morgan Stanley expects strong growth in the coming months. Long-term fundamentals are robustly underpinned by rising incomes.
Industrials (+300bp):
Strong government capex and a nascent pick up in private capex plus inexpensive valuations drive the overweight.
Financials (+300bp):
With the rate cycle behind us and a long pause likely from the RBI, rate sensitives are likely to outperform. Even as this sector has lost its leadership status, the tactical bounce could be very strong.
Utilities (+100bp):
Another rate-sensitive sector that is also supported by attractive valuations.
The global investment bank cuts weigh from the technology & healthcare sectors by 500 bp, & 300 bp respectively. The technology sector is least exposed to a recovery in India’s growth and valuations are relatively rich.
“It is not a call that worked well for us in 2020 given the sector’s outperformance,” added the Morgan Stanley note. The Healthcare sector has demonstrated leadership but is likely taking a breather as attention shifts to cyclicals and rate sensitives.
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