Robust macro indicators and improving corporate fundamentals including expectations of a stable government would aid the Indian markets in the second half of fiscal 2024, according to Morgan Stanley.
However, tight liquidity in the global market and relatively higher valuations may pose a barrier, it said.
Key Upside Triggers
The market's view on the general election 2024 will be a critical deciding factor, the brokerage said. Market’s inclination for a strong government will be priced in, implying upside to share prices with earnings per share estimates being 10 percentage point ahead of the consensus EPS growth forecast for FY24, according to Morgan Stanley.
Adding to this, a softening inflation could bring forward rate cut expectations with Morgan Stanley expecting one in February 2024. While private capex inflows would enhance growth prospects, the consistent foreign flows that could drive BoP into surplus, the brokerage said.
Potential Downside Risks
The key risk to growth would be an unfavourable weather condition that may spike food prices, leading to the RBI to hike rates, the brokerage said. Adding to this, slowing global growth could restrain India’s external performance, impacting earnings, it said.
Another external factor includes more rate hikes by the U.S. Federal Reserve that would adversely impact the rupee, Morgan Stanley said. Considering factors like global liquidity, India's lower beta to emerging markets, and inflated headline valuations, there is a possibility of India underperforming in case of a rally in emerging markets.
The Barbell Portfolio Approach
The S&P BSE Sensex may hit 68,500 by year end, implying an upside potential of 5%, according to Morgan Stanley. The Sensex will trade at a trailing P/E multiple of 23 times, higher than the 25-year average of 20 times, it said. The premium reflects the upbeat sentiment in medium-term growth, it said.
Morgan Stanley recommends a 'barbell portfolio' approach, with a preference for cyclicals followed by defensives and, small and mid caps with large cap in the end. The brokerage is overweight on the financials, technology and consumer discretionary sectors, and underweight in all other sectors.
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