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Indian benchmark indices have rallied over 60% from the lows hit in
Indian benchmark indices have rallied over 60% from the lows hit in

Morgan Stanley expects Sensex at 50,000 by 2021

The firm raised the index target as equities staged a massive recovery from Mar lows

Morgan Stanley has lifted its target for the BSE Sensex to 50,000 by December next year from the earlier 37,300 for June 2021, saying that the upcoming growth cycle is not fully priced in, and there is more upside to the index.

The global brokerage firm, which has an overweight rating on India, also raised the FY21, FY22 and FY23 earnings per share estimates for the Sensex by 15%, 10% and 9%, respectively, indicating between 6% and 7% upside from consensus estimates.

The target for Sensex implies that the index will trade at a forward price-to-earnings multiple of 16 times.

“Covid-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months," Ridham Desai and Sheela Rathi, equity strategist, Morgan Stanley wrote in a note on 15 November.

In a bull-case scenario where the covid situation improves, recovery in growth is sustained and global stimulus supports asset prices, Morgan Stanley has set a target of 59,000 for the Sensex. Similarly, in a bear-case scenario, it sees Sensex at 37,000 if the virus issue lingers well into 2021, and growth falters while India fails to deliver an adequate policy response, leading to losses in the financial system.

Morgan Stanley is among global brokerages who have begun raising their targets for Indian markets, reiterating their bullish stance, as equities staged a massive recovery from the March lows, scaling new record highs ahead of Diwali.

Last week, Goldman Sachs raised Indian equities to overweight on hopes that earnings recovery will lead rally and upgraded its target for the Nifty to 14,100 by 2021-end. Nomura also raised its Nifty target to 13,640 by December 2021 on expectations that capital flows following improved risk sentiment will drive stocks in the near term.

Indian benchmark indices have rallied over 60% from the lows hit in March, while making new record highs last week. Improving economy indicators and recovery in earnings have also boosted confidence for Indian equities.

Foreign institutional investors have pumped in $4.15 billion in November so far, the highest in the last three months, while the inflow was at $10.7 billion so far this year.

Overall, Morgan Stanley expects small and mid-cap stocks to beat the narrow indices or large caps in 2021 as it feels that concentration of market cap and profits may have peaked with the return of the growth cycle. It also said that portfolio returns are more likely to be driven by bottom-up stock picking rather than top-down macro forces.

“Return correlations across stocks with the equity market have risen to levels from where they tend to mean-revert. We expect domestic cyclicals to outperform exports, with rate-sensitives and consumers outperforming whereas energy should underperform," said Morgan Stanley.

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