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Morgan Stanley cuts Sensex target, earnings outlook

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SummaryMorgan Stanley joins increasing number of foreign brokerages that have cut outlook for Indian market.

Morgan Stanley has joined an increasing number of foreign brokerages that have cut their outlook for the Indian market in recent days. Taking into account higher interest rates and its impact on growth, Morgan Stanley revised its earnings expectations and 12-month Sensex target on Wednesday.

The brokerage trimmed its earnings growth forecast for Sensex companies for FY14 from 10.5% to 4.1% and issued a revised 12-month Sensex target of R18,200, implying no upside from current levels. The brokerage also highlighted its bear-case scenario that depicts a 35% probability of a 14% fall in the Sensex during the period.

While it acknowledged that signaling from the RBI and the government has been a key issue for the market, it observed that both agencies are impeded by the state of growth and the political cycle

“The RBI needs to reaffirm that high rates will linger (via a repo rate hike, for example) and the government needs to endorse fiscal consolidation (which could be at risk — a steep diesel price hike could be a good change)..” it noted.

It predicted that in the absence of policy measures, the market may remain in a correction mode as a depreciating rupee forces macro re-balancing. According to the note, although the market-price-to-book ratio (P/B) is close to its bottom, markets are not cheap given the difference between equity yield and short-term yield.

In the recent past, Nomura, Goldman Sachs, UBS and CLSA have all revised their targets for either the Sensex or the Nifty.

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