Ridham Desai of Morgan Stanley has said that there is a strong case for re-rating India. Morgan Stanley expects the Sensex to hit 89,000 by June 2026, implying an upside potential of 12% from current levels for the benchmark Index.
According to Desai, the expected gain in India’s share in the global output going forward is one of the big triggers for the rerating call. This, as per the report, will be driven by strong foundational factors that include robust population growth, a functioning democracy, macro stability-influenced policy, better infrastructure, a rising entrepreneurial class, and improving social outcomes.
Morgan Stanley’s India equity strategy: Lower beta suggests higher P/E
Referring to the 89,000 Sensex target, Desai stated that this level suggests Sensex would trade at a trailing P/E multiple of 23.5 times, ahead of the 25-year average of 21 times, which means it will trade at a premium to the historical average.
“The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India’s lower beta, a higher terminal growth rate, and a predictable policy environment,” said Morgan Stanley.
Speaking about the volatility aspect, Morgan Stanley pointed out that India has lower inflation volatility as a result of both supply-side and policy changes (flexibility inflation targeting). This, they explained, means that volatility in interest rates and growth rates is likely to fall in the coming years. “High growth with low volatility, plus falling interest rates and low beta, equals a higher P/E,” they added.
Morgan Stanley’s Biggest sector views
The international brokerage house has raised the weightage on three sectors in its Model Portfolio, while slashing it on four sectors. However, there were no changes in three sectors.
Consumer Discretionary (+300 bps): The global brokerage house expects a recovery in urban demand to aid overall consumption demand. Likely GST reforms augur well for the Consumer Discretionary sector.
Industrials (+300 bps): Robust government capex and a pickup in private capex drive an overweight rating for the Industrial sector.
Financials (+200 bps): Rising credit growth and low credit costs are offset by likely Net Interest Margin (NIM) compression. Non-bank lenders may outperform banks.
Communication Services: With no change in the weightage, Communication Services’ pricing power could improve, but the brokerage sees better opportunities elsewhere.
Consumer Staples: Fundamentals could improve as rural growth has recovered. However, stocks remain richly valued. In Morgan Stanley’s barbell strategy, it prefers cyclical consumption with no change in weightage.
Technology: Least exposed to domestic growth, although the US recession is a risk to the sector. The AI debate is hurting the sector’s multiples but may not hurt earnings in the foreseeable future.
