Morgan Stanley sees Sensex at 70,000 level by December 2022

Indian stock market’s outperformance relative to emerging markets (EMs) is likely to pause in 2022, said analysts at Morgan Stanley in a recent note, but expects the Sensex to hit the 70,000 mark by 2022-end - up around 17 per cent from the current levels. The research and brokerage house had recently downgraded India to equal-weight in their global emerging markets (GEMs) country portfolio. The market, Morgan Stanley feels, could cool off as it absorbs the gains of the preceding 18 months.

“India’s strong growth and macro stability are driving its re-rating, albeit for now we think the outperformance could pause given strong trailing six-month relative performance (over 30ppt) to emerging markets. Relative valuations are at the high end of the historical range, and there appears to be exuberance among small- and mid-cap stocks,” cautioned Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi and Nayant Parekh.

Indian equities, Morgan Stanley said, are running into many challenges, including the US rate cycle, rising oil prices, elections in key states, potential third wave of Covid wave, upward inflexion in domestic interest rates, rich headline valuations and strong relative trailing performance. 

Despite these headwinds, it remains ‘structurally bullish’ on India and expects the S&P BSE Sensex to scale up to the 70,000 mark (base case; 50 per cent probability) by December 2022; 80,000 level in a bull-case scenario (30 per cent probability) and hover around the 50,000 mark as a bear-case (20 per cent probability).

Thus far in calendar year 2021 (CY21), the S&P BSE Sensex has rallied nearly 25 per cent. Gains in the mid-and small-cap indexes have been sharper with both the indexes moving up 45 per cent and 59 per cent on the BSE respectively, ACE Equity data show. Among sectors, power, realty, metal and capital goods indices have been the top performers, rallying between 51 per cent and 73 per cent during this period.

Corporate earnings

India, according to Morgan Stanley, has entered into a new profit cycle on the back of government's dramatic shift in policy that favours profit share in the gross domestic product (GDP). Index returns, going ahead, are likely to trail earnings growth as the market digests trailing returns, it said.

TABLE: Morgan Stanley's Sensex EPS estimates

“For an economy that is likely to grow at a nominal rate of 10 per cent per annum, if the profit share in GDP hits its long-term average of 3.5 per cent over the next four to five years, it gives us an annual compound growth in earnings of 20-25 per cent for the broad market. We expect earnings to compound 27 per cent annually over the next couple of years. Our F2022 earnings estimate has been lowered by 7 per cent, but FY-23 numbers are unchanged,” Morgan Stanley said.

Clean energy spend, defence indigenisation, a new residential property, auto and air travel cycle, multi-year credit cycle for financials, life insurance, digital transformation, hyper-local commerce and market share concentration plus horizontal growth for discretionary and staple consumption and electric vehicles are the key themes Morgan Stanley is bullish on for 2022.