Significant upside potential for stocks in next 3-5 years: Morgan Stanley

Sensex is currently trading at 31,360 points, while the Nifty is hovering at 9,665

Indian stocks have significant upside potential in the next 3-5 years and will probably outperform emerging markets given the country's 'superior macro environment', says a report.

According to the report by Morgan Stanley Investment Management, valuations are not yet stretched and demand for equities from domestic households is expected to increase, while potential M&A activity may also drive the index higher.

"While the market appears to believe in a growth turn, it is far from pricing in a multi-year growth cycle, implying significant upside potential in the next 3-5 years," the report said, adding "the next few months may witness moderation in absolute returns and higher volatility, especially down the cap curve".

"India has underperformed emerging markets since April. So far, as the global bid on stocks is intact, Indian stocks will probably outperform given India's superior macro environment," it said.

The global brokerage major said investors should own Indian stocks, firstly because PM Modi's reelection is looking more and more likely, second growth cycle is turning and valuations are reasonable.

According to the report, "BJP continues to demonstrate the political astuteness needed to win the 2019 elections -- something that could trigger excitement in stocks".

The report further noted that markets are entering a new growth cycle in which earnings could compound annually at about 20 per cent for the coming five years.

Moreover, valuations are not signalling "excesses" and Indian stocks are attractive relative to US equities, local bonds and in line with history on both an absolute as well as a relative basis.

The benchmark sensitive index Sensex is currently trading at 31,360.63 points, while the Nifty is hovering at 9,665.80.