India's second wave of Covid19 may have peaked and the market is now looking at how quickly the wave descends in addition to how much the vaccination can be ramped up, Morgan Stanley said in a research report —“India Equity Strategy: Mid Year Outlook: Improving Return Outlook for 2H21”.

This came on a day when India reported below 3 lakh daily Covid-19 infections for the second consecutive day on Tuesday at 2.63 lakh, the lowest in last 28 days. The total tally of Covid19 new infections crossed the 25 million mark.

Large caps to outperform

While keeping the Sensex target unchanged at 55,000 as of end December 2021, it sees acceleration in the large cap index return in the coming months and expects India to outperform Emerging Markets. The markets are likely to look through growth deceleration in April-June quarter as it has learned that most of such demand destruction is temporary, said Equity Strategists Ridham Desai and Nayant Parekh and Equity Analyst Sheila Rathi in the research report.

“The challenge for stocks comes from waning liquidity and valuations support. With accelerating earnings and reasonable relative valuations, trailing underperformance and strong policy traction, India seems set to beat EM”, the report noted.

Morgan Stanley’s set of 16 leading indicators and six coincident or lagging indicators suggest an improving market outlook for the second half of 2021, it added.

‘No need for fresh fiscal push’

On a base case, Morgan Stanley expects BSE Sensex to be at 55,000 in end December 2021.”This assumes stability in the current virus situation and a recovery in the economy per our forecasts. We expect Sensex earnings to raise 32 per cent in 2021–22. The government is not required to launch a fresh fiscal programme thanks to the ongoing recovery in the economy, but continues to pursue both administrative and legislative reforms “, the report noted.

Morgan Stanley research has pegged the bull case (30 per cent probability) Sensex at 61,000 and bear case (20 per cent probability) at 41,000.

Key factors

Morgan Stanley feels that Covid-19 trends remain a key near-term input, although policy and earnings will likely be the force in the coming months. It is of the view that the second wave is likely to have a lower economic impact given the lower stringency of lock downs compared to last year. That said, stringency is up from the end of March, which implies a QoQ growth deceleration in the first quarter this fiscal numbers. The equity market is likely to look through this since it has learned that most of such demand destruction is temporary, the report highlighted. India continues to face two opposing challenges – immediate shortages of vaccine supply and a medium-term problem of convincing people to be vaccinated.

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