Morgan Stanley ups September 2019 BSE Sensex target by 17% to 42,000

If investors start expecting that the electorate will deliver a fragmented verdict with weak leadership, the index will likely head towards their bear case scenario of 33,000 levels

Morgan Stanley has upped its September 2019 target for the S&P BSE Sensex by around 17 per cent to 42,000 (up 12 per cent from Tuesday’s levels) from its earlier forecast of 36,000 by June 2019. It also maintains a bullish stance on small-and mid-caps (SMIDs) and suggests investors can start to cherry pick from these two market segments as well.

“On our target, the Sensex would trade at a forward PE of 16.5x (compared to 18x currently) and trailing price – to – earnings (PE) of 20x, higher than the 25-year trailing average of 19x. We think SMID indices look attractive on a market to GDP (gross domestic product) ratio and we think investors should selectively add those stocks,” wrote Ridham Desai, head of India research and India equity strategist, along with Sheela Rathi in an India Equity Strategy report titled: Bull market to broaden.

Among stocks, State Bank of India (SBI), Prestige Estates and Apollo Hospitals now find a place in the Morgan Stanley’s focus list. Infosys, Havells and Zee Enterprises, on the other hand, have been dropped.

The key risk between now and June 2019, Morgan Stanley believes, is that the market turns pessimistic on the outcome of the general elections scheduled in May 2019. If investors start expecting that the electorate will deliver a fragmented verdict with weak leadership, the index, according to Morgan Stanley, will likely head towards their bear case scenario of 33,000 levels, especially if such expectations coincide with deteriorating global equity markets.

As regards corporate earnings, India, the report says, is coming out of the deepest recession that has extended for seven years. It expects the earnings cycle to turn and broaden in the coming months. Confidence of corporates as regards business growth over the next 12 months, improvement in profit margins and peaking out of non-performing loans (NPLs) in the banking sector are the three key reasons it cites that lend support to hope of a pick-up in corporate earnings going ahead.

“Broad-based earnings growth in the coming months likely also changes the behaviour of stocks. Thus, performance of stocks should broaden. We are forecasting profit growth to accelerate 20 per cent over the next couple of years. Similarly, we expect the broader market to see a compounded annual growth rate (CAGR) of about 27 per cent over the next three years, potentially taking the profit share in GDP up by 100 bps,” the report says.