S&P BSE Sensex may hit 80,000 by December 2022 helped by a likely new profit cycle, said foreign brokerage and research firm Morgan Stanley.
S&P BSE Sensex may hit 80,000 by December 2022 helped by a likely new profit cycle, said foreign brokerage and research firm Morgan Stanley. The brokerage firm believes 80,000 is achievable for Sensex in a bull-case scenario, where India would see nearly $20 billion inflows on the back of inclusion in global bond indices. Morgan Stanley said that India remains entrenched in a long-term bull market and that positives outweigh the risks for those willing to take a slightly longer-term view. The positive outlook for Dalal Street comes nearly a month after Morgan Stanley downgraded Indian equities to equal weight.
Bull, base and bear case scenarios
Under the bull case scenario, Morgan Stanley has predicted that India’s Sensex will reach 80,000 mark by December 2022. Here it has been assumed that India gets included in the global bond indices resulting in nearly $20 billion inflows, there is no third wave of covid-19 or any associated lockdowns, the DXY and oil prices are range-bound and RBI’s exit is delayed. The brokerage firm believes there is a 30% probability of this happening.
In the base case scenario, Morgan Stanley assumes stability in the virus situation and economic recovery. Here, Sensex is expected to reach 70,000 from current levels. In this scenario, RBI undertakes a calibrated exit and Sensex earnings compound 27% annually over 2021-23. On the other hand, the bear case scenario would see Sensex plummet to 50,000, provided RBI goes aggressive on tightening to fight inflation.
Higher volatility expected along with upside
“A new profit cycle will likely help keep the bid on Indian shares even though investors should expect near-term volatility and a pause in relative outperformance vs emerging markets,” Morgan Stanley said. The brokerage firm added Dalal Street will face challenges ahead such as elections, US rate cycle, potential Covid wave, and rich valuations, but still remains positive of more upside. In terms of volatility, Morgan Stanley said that domestic markets have been remarkably devoid of volatility over the past several months with both implied and realized vols low relative to history. “With higher valuations and more event risks on the horizon, volatility is slated to rise, especially in the broad market,” they said. India VIX has fallen 16% in 2021 and remains below 16 levels.
Among the reasons that make analysts positive of India’s long-term prospects are new profit cycle, supportive policy, likely rise in fixed income flows, new issuances, and falling return correlations with the world. “While headline valuations look rich, they must be seen in the context of depressed long-term earnings,” the report said.
In terms of portfolio strategy, Morgan Stanley has based key macro themes, including a strong pick up in consumption, normalization of RBI policy and rising share of manufacturing share in GDP. “We are backing financials, cyclical consumption and industrials and are relatively cautious on export sectors,” they said while adding that large-caps will outperform small-caps and mid-caps.