India can outperform EMs; bull-case Sensex target at 41,500: Morgan Stanley

Indian markets are likely to outperform their emerging market peers, suggests Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi. 

“While global market performance remains a key to the absolute performance of Indian stocks in the near term, India's beta to the world has dropped to a 13-year low and possibly sets the stage for India's outperformance in a low-return world,” the report says.

The market, Morgan Stanley says, has digested a rise in rates, domestic political news, a bank scandal, rise in equity supply, protectionist waves, global market volatility, higher rates by the US Federal Reserve (US Fed), higher oil prices and a reduction in foreign portfolio investor (FPI) portfolio weights. 

Morgan Stanley’s S&P BSE Sensex target in a bull-case scenario to which they attach a 30 per cent probability is 41,500. This target is based on better-than-expected outcomes, most notably on policy and global factors. That apart the research house expects earnings growth accelerate to 10 per cent in F2018, 29 per cent in F2019 and 26 per cent in F2020 if the index was to achieve their bull-case target.

Their base-case (50 per cent probability) and bear-case (20 per cent probability) target for the index stands at 35,700 and 25,000 respectively.

Adding: "The medium term (three-year) growth outlook is key to a turn in India's relative performance. We are constructive on growth, but the market is not a believer as yet. As we approach the 2019 general elections, the market is likely to shift focus on likely outcomes as a key driver for performance."

In this backdrop, oil prices are seen as a key threat to equities that can alter the fiscal deficit situation and hamper growth.

That said, the research house sees strong growth in 2018 driven by consumption, exports, government spending and a nascent recovery in private capex. However, they caution against a tighter monetary policy later in 2018 as well as the risk of a higher-than-budgeted fiscal deficit ahead of the general elections scheduled in May 2019.

Recently, Citigroup Global Markets India lowered the December 2018 target for the S&P BSE Sensex to 35,700 citing volatility, earnings downgrades and a drop in local flows.