There is still some more headroom for the markets despite the poll-outcome driven rally that took the S&P BSE Sensex and the Nifty 50 index above the 40,000 and 12,000 levels, respectively in trade on Thursday, the day votes were counted for 2019 Lok Sabha elections.
"India seems to be voting in a majority government for another term. This likely continuity in administration is source of comfort for stocks due to an accompanying policy predictability. We expect some shifts in the policy regime. Sensex target is at 45,000 for Jun 2020," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi, Upasana Chachra and Avni Jain.
The market's focus will now shift to the growth cycle, on which they are constructive. On the economy and policy front, Morgan Stanley expects the Reserve Bank of India (RBI) to be more accommodative and the economy to come out of its soft patch of the past few months.
The ongoing trends, according to Morgan Stanley, suggest that there will be continuity in administration. Earnings, they believe, could be heading into a new cycle and domestic flows should return with strength. That said, oil prices, US Fed rate action, trade tension between the US and China are the key risks to equities, the research and brokerage house says.
“We expect the inflation framework (low food prices and positive real rates), fiscal consolidation, infrastructure spending, FDI focus and strong external affairs policies to continue. The new administration may bring some changes such as increasing cash transfers to poor people (hopefully subsuming existing subsidies), more emphasis on portfolio flows (which lost out in the previous five years), focus on India's external trade and social/constitutional reforms (like Article 370). Legislation is a consensus driven activity given that the NDA remains in minority in the Upper House, for now," the Morgan Stanley note says.
“We are overweight on domestic cyclicals, both consumer and industrials, as well as financials, and underweight defensive sectors including healthcare and technology. We are overweight India in our emerging market model portfolio,” analysts led by Desai wrote in the report.