50% chance of Sensex rising 13% by next August: Morgan Stanley

Morgan Stanley, a US-based investment bank, believes there is a 10 per cent chance for the BSE exchange's 30-share Sensex slipping to a 'bear case' of 22,800, about 10 per cent lower than the current level.

It says the Sensex could go that low if “policy response is lukewarm and, more crucially, global conditions worsen”. Also, if the FY16 and FY17 earnings growth is no more than 10 per cent and 15 per cent, respectively, the market could see such a downside.

Their 'base case' scenario (50 per cent probability) is the index going to 28,800 by August next year, 13 per cent up from the current level. “Growth will slowly accelerate and we expect Sensex earnings growth of 14.6 per cent and 20.1 per cent in FY16 and FY17, respectively. Broad market earnings growth will likely be 13 per cent in FY16 and 15 per cent in FY17” are key assumptions of the base case scenario.

Interestingly, the investment bank has bull case target of 35,700 (40 per cent upside) and it has assigned a 40 per cent probability for this. Achieving the bull case target will hinge on “Better-than-expected outcomes – most notably on policy – lead to a strong bull market, allowing for a sharp decline in short rates, making equities inexpensive. Earnings growth accelerates to 20 per cent and 25 per cent in FY16 and FY17, respectively” says Morgan Stanley.

Morgan Stanley says the Indian market’s performance would depend on policy action. “The outperformance since May makes relative valuations rich, but until global low inflation persists, this outperformance could continue if India's policy makers can transition from caring for macro stability to pursuing growth,” Ridham Desai and Sheela Rathi of Morgan Stanley said.