Sensex will hit 39,000 by year end: The new bull estimate by Morgan Stanley

It's a best case estimate, almost 30% higher than current levels; in worst case, index will shed 20%

Global financial services entity Morgan Stanley has raised its 'Bull case' year-end target for the BSE exchange's benchmark Sensex to 39,000, from the earlier 33,000.

This has come in the wake of the Indian markets scaling new heights. The brokerage says revival in corporate earnings and appetite for equities among domestic investors are expected to be key drivers for the rally. The Sensex closed at 30,188 on Friday.

Which means in its best/Bull case scenario, the probability for which is pegged at 30 per cent, Morgan Stanley sees a 29 per
cent upside to the market by end-December or over the next seven months.

"This could be the beginning of a new growth cycle. Earnings could compound at 20 per cent (annually) over the coming five years. Rising demand for equities from domestic households and potential M&A (merger and acquisition) activity would also push the markets in the coming months," said Ridham Desai, managing director, Morgan Stanley India.

The Base case, where the probability is estimated at 50 per cent, projects the Sensex at 33,000, about 9.3 per cent higher. Whereas, the Bear case (probability, 20 per cent) projects the Sensex at 24,000, a fall of 20.5 per cent from current levels.

On the Indian markets' valuation, Morgan Stanley said they don't look stretched when compared to history or to other markets. For instance, compared to the US markets, Indian valuations look attractive. While India continues to trade at a premium valuation compared to other emerging markets (EM), its return on equity (ROE) is also better.

"Versus EM, India looks rich but then ROE is gapping higher. The Sensex is still in a buy zone versus local bonds but mid-cap valuations look stretched. Valuations are useful to make a market call only at extremes, which is not the case at the moment," Desai added.

However, a sharp rise in commodity prices, steep negative impact of Goods and Services Tax (GST) implementation and/or global volatility could be major headwinds for the markets in the next few months.

The brokerage is most bullish on the consumer discretionary and financials sectors.

"In the consumer discretionary sector, strong consumer loan growth, positive real incomes and a broad recovery in jobs are driving our positive view. In the financial sector, banks are flush with liquidity, which will likely drive loan growth in the coming months. While margins are under pressure for banks, non-banks and property companies look fine on the margin front. Credit costs are also likely to decline, led by M&A activity and a recovery in economic growth," said Desai.

Interestingly, the brokerage is also overweight on the information technology sector, as it believes the sector is undervalued.