The brokerage retained its base case year-end target for Sensex at 55,000, but suggested that if all the pieces fall into place, the 30-stock benchmark could go as high as 61,000 by end of December, a gain of 20 per cent from current level.
“With accelerating earnings and reasonable relative valuations, trailing underperformance and strong policy traction, India seems set to beat EM (emerging markets),” the brokerage said in a note.
Despite the confidence that equity returns will remain positive in the coming six months, Morgan Stanley believes “this is a stock picker’s market, with ample alpha opportunity underscored by falling correlation of returns across stocks.”
“A stock-picker’s market depends more on earnings and earnings guidance than a macro market. That said, the ongoing quarter will contain some deceleration in earnings growth due to the second COVID-19 wave. We think the market is looking beyond that since it has learned that such disruptions can prove temporary,” Morgan Stanley said.
The brokerage said macroeconomic fundamentals and earnings momentum could emerge as the primary driver of the market as against valuations and liquidity.
The brokerage said investors should prefer midcaps over largecaps and largecaps over smallcaps given the market dynamics.
Morgan Stanley believes investors should pour their money on consumer disretionaries, industrials, financials, and utilities, while at the same time trim allocations to information technology, pharma, telecom companies and energy stocks.
Here are the four sectors Morgan Stanley’s betting on:
The brokerage said valuations of consumer discretionary stocks look attractive and with real interest rates likely to be in negative territory through 2021, it expects strong growth in the coming months. Long-term fundamentals are robust underpinned by rising incomes.
On industrials, Morgan Stanley is of the view that strong government capex and a nascent pick up in private capex plus inexpensive valuations should drive the sector.
On financial services, the brokerage argued that with the interest rate cutting cycle over and a long pause likely from the RBI, rate-sensitives are likely to outperform. Even as this sector has lost its leadership status, the tactical bounce could be very strong.
And for the utilities sector, the brokerage’s argument is similar to that for financial services which is also supported by attractive valuations.
