An Overview of Morgan Stanley’s Report
- According to Morgan Stanley’s latest report, Indian equities are expected to outperform their emerging market (EM) peers in 2021, with bets on domestic cyclical stocks leading the way, led by rate sensitives. For the time being, the research and broking house has kept its December 2021 goal for the S&P BSE Sensex unchanged at 55,000 (base case; 50% probability) – a 10% increase from current levels.
- “Our BSE Sensex goal of 55,000 remains unchanged. The BSE Sensex will trade at a forward P/E multiple of 17.5x and a trailing P/E of 21.2 at this stage, which is higher than the 25-year average of 19.7x. This premium over the historical average reflects India’s increased optimism about the medium-term growth cycle. In the light of global emerging markets (GEMs), we are overweight on India,” wrote Ridham Desai, Morgan Stanley’s head of India research and India equity strategist.
- Morgan Stanley sees the Sensex at 61,000 levels in a bull-case scenario (30 percent probability), which is a 22% increase from current levels, while a bear-case scenario with a 20% probability pegs the Sensex at 41,000 levels by December 2021. “Our collection of 16 leading indicators and six coincident or lagging indicators point to a better market outlook in the second half of 2021,” says the report. “Domestic cyclicals, rate sensitives, global cyclicals, protective exporters and mid-caps, large caps, and small caps are in our pecking order,” Morgan Stanley said.
Pandemic Wave and Markets
- Morgan Stanley claims the country’s second wave of pandemic diseases has peaked, and markets are now focusing on how rapidly the wave recedes, as well as how much vaccination can be increased. Although the pandemic-related lockdown and mobility restrictions are likely to have an effect on corporate profits, Morgan Stanley claims that investors will be able to look beyond the disruption.
- Morgan Stanley maintains bullish positions in Consumer Discretionary, Industrials, Financials, and Utilities, while remaining neutral in Materials and Consumer Staples and underweight in Communication Services, Energy, Healthcare, and Technology.
Consumption has Decreased
- Meanwhile, analysts believe that extending the lockdown could hurt overall consumption, particularly now that the pandemic infections have spread to rural India. Analysts conclude that forced or involuntary savings are being replaced by precautionary savings, as some of the year’s pent-up demand has been exhausted.
- Rural demand is dwindling due to the spread of a virus in rural areas. In contrast to a V-shaped recovery in FY21, consumption redux in FY22 could look more U-shaped, according to a first cut comparison of the response of high frequency consumption-oriented indicators during the first lockdown with the early patterns of the ongoing lockdown.
- Morgan Stanley analysts continue to favour domestic cyclicals over exporters, rate-sensitive and consumer stocks over oil, and SMIDs (small and mid-caps) over large caps when it comes to equity strategy. “We believe the budget reforms would encourage a new private investment cycle, resulting in a rebound in domestic equity flows and overall growth.”
- Morgan Stanely identifies the following main themes in the budget: a somewhat gradual fiscal reduction glide path with looser-than-expected fiscal deficit goals, a strong spending mix and realistic fiscal math assumptions, and an emphasis on privatisation, asset monetization, and long-term support for infrastructure investment.