Goes underweight on HLL, says sensex is four years away and large-caps a decade from their peaks

And for those who follow the fortunes of the Bombay Stock Exchange sensex, there is bad news: the benchmark could be four years away from hitting its previous peak, assuming a compounded annual return of 18 per cent.

“Several large-cap stocks are almost a decade away from their bubble peaks,” the report says.

According to the report, this is a bear market with a difference — in the sense that it is “a bear market that has enhanced portfolio performance. It seems to be a different type of a bear market”. A market with a strong relative performance, tolerable breadth and one that is discriminating between fundamentals and valuations,” is the verdict.

A large part of the multiple erosion in this bear market has been driven by a deterioration in the fundamentals, Morgan Stanley has said.

The bear market is all the more perplexing this time since “Indian equities have outperformed many major markets by almost 30 per cent since May 2002. The collapse in the market is explained more by fundamentals than bearish sentiment.

The investment banker did an assessment of the gross domestic product (GDP) growth rate and the return on equity and has come up with the conclusion that these two key drivers of equities do “not present an attractive picture.”

While the GDP growth rate has been decelerating, any increase in return on equity (ROE) may not be sustainable “given that we believe that the interest rate cycle may have bottomed out and that the growth environment is low. Thus the bear market appears justified.”

In this type of situation—marked by low growth, a range-bound equity market and compression of valuation spreads—”stocks with potential growth surprises could be strong performers.”

The investment bank has recommended HDFC Bank, Dr Reddy’s and Infosys as prime examples of such stocks.

So it has increased its weightage for Dr Reddy’s from 6.9 to 7.9 per cent, for Infosys from 17.4 to 17.9 per cent, while Hindustan Lever’s weightage has been reduced from 13.1 per cent to 10.6 per cent.

Elaborating on the reasons behind lowering Hindustan Lever’s weightage, Morgan Stanley has pointed out that there are rising concerns of the company’s growth prospects.

There is “greater risk to volume growth and margin expansion” for the company in the current fiscal as well.

With respect to the market, the report has said that assuming that the equities market will grow at a long term annual return of 18 per cent, “we conclude that 15 out of top 40 stocks are at least five years away from previous peaks with several of them more than 10 years away.”

For instance NIIT is expected to take 21 years to reach its peak, Zee Telefilms 19 years, HCL Technologies 13 years, VSNL 13 years, 12 years for Wipro, Satyam and Mahindra & Mahindra, 11 years for MTNL, 7 years for L&T and Infosys, while the sensex itself will reach its previous peak only after another four years.

Fundamental issue