Sensex may touch 39,000 in a 'bull case' scenario: Morgan Stanley

Global brokerage firm Morgan Stanley today said it expects the Sensex to touch the 39,000 mark in a 'bull case' scenario by this December.

"Domestic appetite for equities remains strong. The sentiment is off lows though yet to hit exuberant territory," Morgan Stanley India Strategist Ridham Desai and Sheela Rathi said in a research note.

The brokerage has a base case (50% probability) target for BSE Sensex at 30,000, a bull case (30% probability) of 39,000 and a bear case (20% probability) of 24,000.

"Strong corporate payout (buybacks and dividends), a new M&A cycle, and robust household demand for equities combined with improving growth and reasonable equity valuations (versus emerging markets and bonds) bring our bull case into play," it said.

On corporate fundamentals, the report said that improving the external environment, stronger consumption, and robust public capex augur well for earnings, although "headwinds" may come from higher oil prices and sluggish private capex.

"Corporate M&A is likely ticking higher given strong free cash flows and higher nominal growth. Combined with strong domestic flows, this creates a case for an overshoot in Indian equity multiples," the report said.

Sector-wise, the brokerage is 'overweight' on consumer discretionary, financials, and technology and 'underweight' on consumer staples, energy, materials and telecoms.

The 30-share benchmark index Sensex is currently trading at 28,300 level, while the NSE Nifty is quoted at 8,700 level.

Regarding the RBI's policy stance, the report said the end of the easing cycle is likely nearing, given higher oil prices and US rates and stickiness in core inflation.

The Reserve Bank in its policy review meet on February 8 kept key interest rate unchanged at 6.25% and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth.

The next meeting of the MPC is scheduled on April 5 and 6, 2017.