The Indian equity market is likely to be an "outperformer" even as absolute returns are likely to be capped by a tepid global equity market outlook, a Morgan Stanley research report said.
According to the global financial services major, while improving growth and reasonable large cap valuations are expected to boost markets, in an election year, rising oil prices and higher yields are expected to drag.
Morgan Stanley pegged the Sensex earnings growth at 5 percent, 23 percent and 24 percent for financial year 2017-2018, financial year 2018-2019 and financial year 2019-2020, respectively.
In the base case (50 percent probability), Morgan Stanley expects the S&P BSE Sensex to be around 36,000 points by June 2019. In the bull case (30 percent probability), the S&P BSE Sensex may be at 44,000 points. And in the bear case (20 percent probability), it may be at around 26,500 points.
The S&P BSE Sensex is currently hovering around 35,600 points.
"While global market performance remains a key to the absolute performance of Indian stocks in the near term, India's beta to the world has dropped to a 13-year low and possibly sets the stage for India's outperformance in a low-return world," Morgan Stanley said in a research note.
However, oil prices are a key risk to equities, given its ability to cause pain to the fiscal deficit and, therefore, growth, the global brokerage major said.
"We see strong growth in 2018 and 2019 driven by consumption, exports, government spending and a nascent recovery in private capital expenditure. We see a tighter monetary policy in 2018 as well as the risk of a ‘higher-than-budgeted’ fiscal deficit as we approach elections in 2019," the report added.