Morgan Stanley's bull case scenario sees Sensex at 61,000 by December 2021

Indian equities are likely to outperform their emerging market (EM) peers in 2021, says the latest report by Morgan Stanley and bets on domestic cyclical stocks followed by rate sensitives. The research and broking house, however, has kept its December 2021 target for the S&P BSE Sensex unchanged at 55,000 levels (base case; 50 per cent probability) for now – an upside of around 10 per cent from the current levels. 

“Our unchanged BSE Sensex target of 55,000. This level implies that the BSE Sensex would trade at a forward P/E multiple of 17.5x and a trailing P/E of 21.2, ahead of the 25-year average of 19.7x. This premium over the historical average reflects a higher confidence in the medium-term growth cycle in India. We are overweight on India in a global emerging markets (GEMs) context,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a coauthored report with Sheela Rathi and Nayant Parekh.

In a bull-case scenario (30 per cent probability), Morgan Stanley sees the Sensex at 61,000 levels – an upside of around 22 per cent from the current levels, while it's bear case scenario that has a 20 per cent probability pegs the Sensex at 41,000 levels by December 2021.

“Our set of 16 leading indicators and six coincident or lagging indicators suggest an improving market outlook for the second half of 2021. This is a stock-picker’s market, with ample alpha opportunity underscored by falling correlation of returns across stocks. Our pecking order: domestic cyclicals, rate sensitives, global cyclicals, defensives exporters and mid-caps, large caps, small caps,” Morgan Stanley said.

Covid wave and markets

The second wave of Covid infections in the country, Morgan Stanley believes, may have peaked and the markets are now looking at how quickly the wave descends, in addition to how much the vaccination can be ramped up. While corporate earnings are likely to be impacted due to the Covid-triggered lockdown and mobility curbs, markets are likely to look through this disruption, Morgan Stanley believes.

EPS estimates

“India faces two opposing challenges – immediate shortages of vaccine supply and a medium-term problem of convincing people to be vaccinated. At the margin, the equity market will be assessing the shift in vaccine supply as a key input. Our earnings outlooks for FY22 and FY23 are unchanged from where we were at the start of the year,” the report said.

Sector-wise, Morgan Stanley remains bullish on Consumer Discretionary, Industrials, Financials and Utilities; neutral on Materials and Consumer Staples; and underweight on Communication Services, Energy, Healthcare and Technology sectors.

Consumption hit

Meanwhile, the possibility of a further extension in lockdown, analysts feel, could hurt the overall consumption – more so when the Covid infections have reached rural India. 

Forced or involuntary savings, analysts believe, are now getting replaced by precautionary savings, while there is exhaustion of some part of pent-up demand last year. 

“Rural demand losing its vigor amidst proliferation of virus in rural centers. A first cut comparison of the response of high frequency consumption-oriented indicators during the first lockdown with the early trends of the ongoing lockdown, suggests that in contrast to a V-shaped recovery in FY21, consumption redux could look more U-shaped in FY22,” wrote Shubhada Rao, founder, QuantEco Research in a co-authored note with Yuvika Singhal and Vivek Kumar, their economists.