Correction has made stocks attractive, says Morgan Stanley

The correction in 2011 has made Indian equities more attractively valued, according to a Morgan Stanley India Strategy report.

Though the market is structurally bullish, it is subject to extreme volatility given the need to balance growth and inflation, says the report. In the near term, Morgan Stanley says, the market may remain range-bound and in all probability; the Sensex would end 2011 at 22,100.

There is a 65 per cent probability of the BSE Sensex staying at 21,115 levels whereas the chances of the index touching 26,727 levels is 25 per cent, says the report.

The chances of correction to 16,773 levels are only 10 per cent, says Morgan Stanley.

Indian investors, over the next six to eight weeks, have to watch out for the second round of quantitative easing in the US, the monsoon (and hence inflation) and announcements by the Government of India on policy and new projects, the report states.

Other issues to watch out for are the dollar index, oil prices, the political situation in West Asia, China hard landing, Indian corporates' performances and the cautious approach of marketmen.

There should be intense focus on stock-picking with macro influence on stock prices having already peaked. As a result small- and mid-cap stocks look very attractive, say Morgan Stanley.

Industrials (engineering, Infrastructure and capital goods) are under threat of a slowdown in capital expenditure and the market has already hit stock prices in these sectors badly.

If inflation moderates, one should buy global commodities, energy and technology, and avoid staples and telecom. In case inflation doesn't moderate, one should buy into banks and industrials and avoid technology, says Morgan Stanley.

A flare-up in oil prices or growth surprises in the developed markets (which would mean redeployment of FII flows or an outflow) are risks to Indian equities, the report adds.

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