The Sensex hit the historic milestone today as Prime Minister Narendra Modi is set for a second term with a comfortable majority. Morgan Stanley has a Sensex target of 45,000 by June 2020, an upside potential of more than 10% from current levels. “The ongoing trends suggest that there will be continuity in administration. This means the equity markets can predict policy. India's policy certainty index relative to the world which was threatening to roll over could now make fresh peaks," it said.

The financial services major expects the Modi 2.0 administration to continue with its “inflation framework (low food prices and positive real rates), fiscal consolidation, infrastructure spending, FDI focus and strong external affairs policies."

But “we think the new administration may bring some changes such as increasing cash transfers to poor people (hopefully subsuming existing subsidies), more emphasis on portfolio flows (which lost out in the previous five years), focus on India's external trade (export share in global exports has stagnated)," it said.

Morgan Stanley expects the RBI to be more accommodative and the economy to come out of its soft patch of the past few months.

Morgan Stanley is overweight domestic cyclicals, both consumer and industrials, as well as financials, and underweight defensive sectors including healthcare and technology.

The Sensex today rose more than 1,000 points intra-day to hit 40,000 for first time before giving up a bulk of its gains on weak global cues and profit-taking at higher levels. The Nifty also hit 12,000 mark intra-day.

Some analysts see limited upside potential in the near term, citing high valuations.

“Valuation wise Nifty at 12,000 trades at around 19 times forward earnings. Hence we see limited upside potential in the Nifty in the near future," says Rusmik Oza, head of fundamental research at Kotak Securities.

He thinks consumption stocks could take a back seat because of the slowdown in demand and rich valuations. Instead he sees, “more value and upside potential" in the midcap and smallcap space hereon.

“With NDA coming back into power we can expect local investors to take comfort in the midcap and smallcap space with a longer 2-3 year horizon and inflows could resume in them," Oza said.

“Based on our reading of BJP’s manifesto and interim budget, we feel capital goods, construction, building materials, corporate banks, power equipment, housing finance companies could benefit the most in the next one year," he added.