Global financial major Morgan Stanley says the Sensex will see a further downside in the near future, before touching record highs over the next year and a half. It has, however, pegged its annual returns in single digits over the next three years.
“It suggests there is a downside to the Sensex in the next three months... but, over the next 18 months, the market is heading for a substantially higher level, with the Sensex potentially breaking 30,000,” says the report released on Wednesday. Over the next three years, the Sensex returns could disappoint, with a compound annual outcome of 8.3 per cent, it adds.
The Sensex on Thursday snapped its three-day fall, gaining 55 points to close at 18,141.40. In the current calendar year, the Indian index has been the worst performer among most of the leading world equity indices, shedding more than 11 per cent. Meanwhile, the Dow Jones gained nearly 9 per cent in 2011 and the S&P 500 moved up nearly 6 per cent. Sri Lanka’s benchmark index, incidentally, has gained nearly 11 per cent since the start of the current calendar year.
Morgan Stanley, however, has added a caveat. It has used the modified earnings yield gap approach to predict the Sensex returns, which historically is known to be more accurate while making predictions over a three-year forward term.
“This is where the model has the best predictive power and essentially the message is that, for medium-term investors, equity valuations are middling at the current level of short rates,” notes the report while explaining the subdued 8.3 per cent annual returns on the 30-share Sensex over the next three years. It also adds the model has “low accuracy for short-term forecasts”.
“We have modified the traditional earnings yield gap model, using short instead of long rates. The resulting earnings yield gap appears to have strong predictive power on medium-term (three-year forward) market returns,” adds the report.