Morgan Stanley, a global investment bank and wealth management firm, sees benchmark Sensex hitting a level of 74,000 by end December this year on a base case scenario. 

On a bull case, BSE Sensex could touch 86,000 by end December this year, Morgan Stanley India Equity Strategists Ridham Desai and Nayant Parekh said in a new Research Note titled “Is the Market Overbought?”.

Although the valuations, in particular market cap to GDP, appear to be stretched, the share prices have barely kept pace with earnings over the past 3-5 years, whereas India remains in an earnings upcycle, it noted.

“Trend earnings are still below nominal GDP and India’s relative earnings growth looks significantly better than emerging market”, the research note said.

Highlighting that India remains one of Morgan Stanley’s top picks, the note pointed out that an index target of 74,000 implies upside potential of four per cent from end December 2023 to December 2024. 

This level suggests that the BSE Sensex will trade at a trailing P/E multiple of 24.7X, ahead of the 25-year average of 20x.

“The premium over the historical average reflects greater confidence in the medium term growth cycle in India,” it added. 

For the base case target of 74,000 (50 per cent probability), Morgan Stanley has assumed continuity in government with a majority mandate, robust domestic growth, the US does not slip into a protracted recession and benign oil prices. The other assumptions include government policy remains supportive, RBI executes a calibrated exit from its current hold stance and Sensex earnings compound 21.5 per cent annually through FY25-26.

BULL CASE 

For the bull case prediction of 86,000 (30 per cent probability), Morgan Stanley has — in addition to the already outlined assumptions of government continuity, robust domestic growth, etc — also pencilled in oil prices dip into the $70s or below resulting in lower domestic inflation and deeper rate cuts from the RBI.

It also expects the US growth cycle renews with global share prices responding with a strong up move and bond flows surprise to the upside. It also sees earnings growth compounding 24 per cent annually over FY 23-26.

BEAR CASE 

Morgan Stanley sees benchmark Sensex coming down to 51,000 by December 2024 in a bear case scenario. It has assigned 20 per cent probability of this playing out. This could happen if India’s elections deliver an unclear mandate with a change in government, oil prices surge past $110 per barrel, the RBI ends up tightening to protect macro stability and a US recession leads global growth lower. This bear case could play out if Sensex earnings compound 15.5 per cent annually over FY23-25 with meaningful slower growth in FY25 and equity multiples de-rate to reflect poor macro conditions. 

Morgan Stanley expects further rise in volatility even as Volumes, which have risen, could rise further due to elections likely in April/May; cues from US Stock and bond markets and oil prices — while India remains less affected than in the past, further rise will present headwinds. 

It also sees volumes going up due to earnings — Morgan Stanley estimates are ahead of the consensus; monetary policy — base case is status quo but inflation and Fed moves are key. Bond flows could start affecting the balance of payments positively starting next year and this could boost stock market volumes. 

STILL A MACRO MARKET

Noting that India is still a macro market, Morgan Stanley, however, expects the macro trade to peak in the coming weeks. 

It prefers cyclicals over defensive, large-caps over small- and mid-caps. Morgan Stanley is overweight on financials, technology, consumer discretionary and industrials and underweight on other sectors.

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