Despite the weakness in equity markets, Morgan Stanley India sees a 24% upside for the benchmark equity index Sensex at 95,000 points by the end of the year, indicating a sharp recovery in the market. This would be supported by stocks’ 12-month trailing performance, valuations, foreign investors’ positioning, and the resumption of earnings up cycle, it said in an equity strategy report. Morgan Stanley’s bull-case target for the index is 107,000 points, which is a 40% rise from the current level.
This assumes crude oil prices below $70 per barrel and a 19% annual earnings growth in FY26-FY28. On the other hand, the bear-case target for Sensex is 76,000 points, down less than 1% from the spot level. This is under the assumption of crude prices to be more than $100 per barrel, 15% annual earnings growth, tighter monetary policy by the Reserve Bank of India (RBI), and a likely recession in the US.
Morgan Stanley also said that the market’s trailing performance is almost the worst in the history and relative valuations are at previous troughs. “India’s share in profits exceeds its index weight by the highest margin ever, and the Sensex is nearly the cheapest ever in gold terms.” Foreign portfolio investors’ positioning has also weakened over the last several months, it added. Passive money needs to keep selling to keep pace with India’s falling index weight and hedge funds favour India as a funding short.
However, among the good news is the resumption in the earnings up cycle, with high-frequency data showing strength. The rupee remains undervalued but the Reserve Bank of India (RBI) has turned its sentiment on the currency, the global financial services firm said. Other key catalysts for the market include continuing policy reform, particularly in the electricity sector, productivity boost from artificial intelligence, and the surge in buybacks. Morgan Stanley has ‘overweight’ on financials, consumer discretionary and industrials, while it is ‘underweight’ on energy, utilities, and healthcare.