Indian stocks are jostling weak emerging markets, rising rates, higher oil prices, an upcoming general elections and relatively rich mid-cap valuations. Morgan Stanley, in its latest report titled ‘India Equity Strategy’, highlights 6 factors which are favouring Indian markets and six which are working against.
The global investment bank prefers largecaps over midcaps. On the sectoral front, it likes banks (private corporate and retail), discretionary consumption, industrials and domestic materials, and advise investors to avoid healthcare, staples, utilities, global materials and energy.
The global investment bank in its base case scenario (with 50% probability) expects the S&P BSE Sensex to trade at 36,000 by June 2019 which is under 16x one-year forward P/E, and below historical averages.
Under the scenario, the earnings growth will be 5% (year-on-year) in FY18, 23% year-on-year in FY19 and 24% year-on-year in FY20.
In the bull case scenario, which has a probability of 30%, Morgan Stanley sees Sensex hitting 44,000-level largely led by better-than-expected outcomes, most notably on policy and global factors. The market starts believing in a strong election result as well, and the earnings growth accelerates to 29% in FY19 and 26% in FY20.
In the bear case scenario, which has a 20% probability, the S&P BSE Sensex could slip towards 26,500 as global conditions deteriorate and the market starts pricing in a poor election outcome. Sensex earnings will grow at 21% in FY19 and 22% in FY20.
Here are 6 factors which are in favor of Indian equities:
Strong macro stability evident in a positive BoP and backed by a Central Bank that is committed to keeping real rates positive.
A bullish steepening of the yield curve, which is at post-2010 highs – the yield curve correlates positively with stocks.
A low and falling beta, which augurs well in a weak global equity market environment as we have seen over the past few weeks.
India's growth is likely accelerating relative to EM. Our work shows that corporate confidence is at a multiyear high and profits are likely to mean revert from below trend.
Strong domestic flows, currently averaging around US$2-2.5 billion a month, which we believe are in a structural uptrend.
Weaker FPI positioning, now at 2011 levels.
What is working against Indian equities?
Likely rising crude oil prices, which could put pressure on growth.
Upward pressure on inflation from food price hikes making sure that more rate hikes are coming.
The election cycle, which brings its own set of uncertainties.
Relatively rich mid-cap valuations (even after the recent drawdown).
Equity valuations relative to bonds is at the top end of its range, indicating that the market is pricing in some part of the coming growth recovery.
Rising equity supply
Morgan Stanley Focus List:
Stocks which are included in Morgan Stanley’s focus list include names like Bajaj Auto, M&M, Maruti Suzuki, ZEE Entertainment, Titan Company, HDFC Bank, IndusInd Bank, Adani Ports, etc. among others.
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