Sensex can hit 80,000 by December 2023 in bull-case, says Morgan Stanley

The bull-run in Indian equity markets is intact, said analysts at Morgan Stanley in a recent note, and expect the S&P BSE Sensex to hit 80,000 levels by December 2023 in their bull-case scenario, to which they have assigned a 30 per cent probability. From the current levels, this translates into an upside of nearly 29 per cent.

For this, while the corporate earnings are projected to compound 25 per cent annually over FY22-25, Morgan Stanley expects India to be included in the global bond indices, which could result in nearly $20 billion of inflows over the subsequent 12 months. That apart, commodity prices including oil and fertiliser are expected to correct sharply.

As their base-case, however, Morgan Stanley sees the S&P BSE Sensex to scale up to 68,500 levels – up 10 per cent from the current levels.

“This level suggests that the BSE Sensex will trade at a trailing P/E multiple of 25x, ahead of the 25-year average of 20x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi and Nayant Parekh. VIEW CHART

For this, Morgan Stanley has assumed that the effects of the Ukraine-Russia conflict (elevated commodity costs) do not spill over into 2023, domestic growth continues its strong path, and the US does not slip into a protracted recession. Back home, they hope for a supportive government policy and the Reserve Bank of India (RBI) executes a calibrated exit from its tight monetary stance. Sensex earnings in this scenario are expected to compound 22 per cent annually through fiscal 2024-25 (FY25).

Their bear-case scenario (20 per cent probability), sees the S&P BSE Sensex at 52,000 levels amid high commodity prices, aggressive tightening by the RBI and a protracted recession in the developed world.

That said, Indian markets have been relative outperformers globally since July 2022 in the backdrop of strong flows by foreign institutional investors (FII), who have put in over Rs 80,191 crore ($10 billion)  since then till November 25, NSDL data show. As a result, the frontline indices, the S&P BSE Sensex and the Nifty50, have rallied nearly 18 per cent since then.

Morgan Stanley expects the pace of flows into Indian equities – both by FIIs and domestic institutions – to continue in 2023 as well.

“The concomitant effect is that the absolute level of share prices could rise in 2023 after spending the bulk of 2022 in negative territory. While we expect the domestic bid on shares to continue and also predict buying by foreign portfolio investors, part of this demand will likely be met by renewed primary market activity. Going into H2-2023, the market should start factoring in its view on the general elections (slated for May 2024) with either outright repositioning or considerable hedging of portfolios,” the report said.

Those at Credit Suisse, too, have started to caution against the rich valuation of Indian equities and suggest stock selection to be key for healthy portfolio returns in the months ahead. Though they expect the equity markets to remain resilient compared to their global peers as domestic economic momentum remains strong, MSCI India PE premium versus its global peers, they caution, remains stretched.

“We recommend investors to remain prudent in their equity allocation strategy and focus on sectors/companies with high domestic exposures as the global outlook remains unfavorable, we believe any sharp correction could provide a buying opportunity. We continue to prefer banks, pharma, and also like sectors that could benefit from lower crude oil prices,” wrote Jitendra Gohil, director, global investment management, wealth management, India at Credit Suisse in a recent coauthored note with Premal Kamdar.