India Stock Return Prospects To Improve In Second Half, Says Morgan Stanley

Indian stock market's ongoing consolidation is improving its return prospects going into the second half of 2021, according to Morgan Stanley.

While Morgan Stanley's indicators for global liquidity and valuations currently point to negative returns over the next 12 months, its leading India indicators on growth, stability, government and Reserve Bank of India policies, and corporate earnings are “generally positive about equity returns”, according to a note. A set of 16 leading and six coincident or lagging indicators suggest an improving market outlook for the second half of the year, it said.

There is ample alpha opportunity or chance to beat the benchmarks, said the note written by Ridham Desai, managing director at Morgan Stanley India, and other strategists. While Covid-19 trends remain key in the near term, Morgan Stanley said policy actions and earnings will likely have a larger impact.

“The government has made a concerted effort to boost the share of corporate profits in GDP and, if this continues, we could enter a new profit cycle,” the note said. “The ongoing quarter will contain some deceleration in earnings growth due to the second Covid-19 wave. We think the market is looking beyond that since it has learned that such disruptions can prove temporary.”

Morgan Stanley's key themes in the order of preference are:

• Domestic cyclicals, rate sensitives, global cyclicals, defensives exporters.

• Mid caps, large caps and small caps.

Morgan Stanley's earnings outlook for 2022 and 2023 remain unchanged. It also retained BSE Sensex target of 55,000, implying an upside potential of 12% by December. This level implies that the BSE Sensex would trade 17.5 times its forward earnings and 21.2 times its trailing earnings, higher than 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,” Morgan Stanley said. “We are overweight on India in a global emerging markets context.”

• In a bull case, if the virus ebbs completely, recovery in growth is sustained, and global stimulus supports asset prices, Morgan Stanley sees BSE Sensex at 61,000 by December 2021.

• It's bear case estimate, if the “virus lingers well into the second half of 2021, and growth falters”, is that the benchmark will fall to 41,000.

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