Morgan Stanley expects the BSE bellwether Sensex to reach 68,500 points by December, a potential increase of 10 percent from the current level and expects the index to trade at a trailing price-to-earnings multiple of 20.5 times compared to a 25-year average of 20x. The brokerage firm said that the premium over the historical average reflects greater confidence in medium-term growth.
The target on the Sensex is based on factors such as the absence of significant upward movements in commodity prices, the US escaping a recession, and the Reserve Bank of India maintaining a pause in its actions.
"We assume no major up-move in commodity prices, especially oil and fertiliser, stable domestic growth as per our forecasts, the US does not slip into a recession, RBI exits at 6.5 percent repo and the government policy remains supportive through strong infrastructure spending. Sensex earnings compound 22 percent annually through F2025," Morgan Stanley said in a note to its investors.
It suggests that India's position in the global order is on the rise, and despite their relatively high valuations, local stocks continue to be attractive. This attractiveness is driven by strong earnings growth prospects and a growing interest from both domestic and foreign investors. Despite the rich valuations, the positive outlook for India's economy and the increasing confidence in its potential have contributed to the continued appeal of investing in Indian stocks.
The manufacturing and capital expenditure sectors see a resurgence, while exports are on the rise. Additionally, the current account situation is improving, and there are significant shifts occurring in consumer behaviour. It is anticipated that interest rate cycles will become less volatile, the Morgan report said.
Morgan Stanley has shifted its strategy from a stock pickers' market and now recommends adopting a barbell portfolio approach. This approach suggests favoring cyclicals over defensives and focusing on small and mid-cap stocks rather than large-caps.
In terms of specific sectors, Morgan Stanley suggests an overweight (OW) position in financials, technology, consumer discretionary, and industrials. Conversely, they recommend underweighting (UW) to all other sectors.