Morgan Stanley Expects Sensex To Touch 50,000 By End Of 2021

Morgan Stanley has raised its target for the Sensex, citing the coming growth cycle is not fully priced in.

The S&P BSE Sensex is expected to touch 50,000 by the end of next year against an earlier target of 37,300 by June 2021, the global investment bank and financial services company said in a note, as it maintained an ‘overweight’ rating on India.

“Covid-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months,” Morgan Stanley said in the note. It also raised the earnings per share estimate for the Sensex by 15%, 10% and 9%, respectively, for FY21, FY22 and FY23. That’s 6-7% above the consensus estimates.

India’s benchmarks had joined their global peers in the worst selloff in more than a decade, tumbling 40% from the peak in January to their March-low, after the nation imposed one of the world’s harshest lockdowns to contain the coronavirus. But they have since erased losses, riding on the optimism stemming from the fiscal and monetary stimulus announced by the government and central bank, a faster-than-expected pickup in economic activities after lockdown curbs were eased and a potential Covid-19 vaccine, among others.

Morgan Stanley presented a bull case target of 59,000 for the Sensex, indicating a 35% upside from the current level, assuming the virus situation improves, recovery in growth is sustained and global stimulus supports asset prices.

In a bear case scenario, it sees the Sensex fall to 37,000, a 15% drop from the current level, if the virus issue lingers well into 2021 and growth falters as India fails to deliver an adequate policy response leading to losses in the financial system.

Also, Morgan Stanley expects mid- and small-cap companies to outperform their large-cap peers. “Improving growth favours smaller firms which have higher operating and financial leverage. SMID (small and mid cap) valuations are looking attractive relative to GDP and money supply, setting the stage for outperformance versus large-cap stocks in the coming months,” it said.

Among individual sectors, the global investment bank is ‘overweight’ on consumer discretionary, industrials, financials and utilities.

“A strong domestic macro climate means that domestic cyclicals should outperform. The end of the rate cycle favours rate-sensitive [sectors] like financials and utilities. Additionally, negative real rates favour consumers both discretionary and staples,” Morgan Stanley said, adding it’s ‘underweight’ on technology and energy.

The financial services provider also increased the weight of financials by 100 basis points in its sector model portfolio, while reduced that of healthcare by the same value. It added State Bank of India to its ‘focus list’ and removed Apollo Hospitals.