The market is far from pricing in a multiyear growth cycle, implying significant upside potential in the next 3-5 years.
The market appears to believe in a growth turn, but it is far from pricing in a multiyear growth cycle, implying significant upside potential in the next 3-5 years, Morgan Stanley said in a note.
That said, the next few months may witness moderation in absolute returns and higher volatility, especially down the cap curve. But, here are 5 reasons why investors should own Indian stocks now.
PM Modi's re-election is looking more and more likely:
The BJP continues to demonstrate the political astuteness needed to win the 2019 elections – something that could trigger excitement in stocks. For example, the party broke a prospective grand alliance of opposition parties by nominating Ram Nath Kovind as its candidate for President.
Changing India's fiscal year-end will give the government an additional Union Budget before elections – another potent tool to win the polls.
Growth cycle is turning and valuations are reasonable:
Evidence keeps building that we are entering a new growth cycle in which earnings could compound annually at about 20 percent for the coming five years.
The valuations are not signalling excesses. Indian stocks are attractive relative to US equities, local bonds and in line with history on both an absolute as well as a relative basis.
Domestic liquidity super cycle:
India has underperformed among emerging markets since April. So far, as the global bid on stocks is intact, Indian stocks will probably outperform given India's superior macro environment. Of course, this also represents the biggest risk to the current rally.
50 percent probability that Sensex could hit 34K by June 2018
Morgan Stanley sees Sensex hitting 34,000 in the base case scenario by June 2018. In this case, all outcomes are moderate and growth accelerates slowly. “We expect Sensex earnings growth of 18 percent and 24 percent on a YoY basis in F2018, and F2019, respectively,” said the report.
In the bull case scenario, Sensex could well hit 39,000 in which the global investment bank expects better-than-expected outcomes, most notably on policy and global factors. “Earnings growth accelerates to 19 percent in FY2018 and 27 percent in FY2019,” said the report.
Earnings revisions will likely turn positive in the coming six months after six years in negative territory. Valuations are not yet stretched against history, other markets, and bonds.
“Rising demand for equities from domestic households and potential M&A activity could take multiples higher in coming months,” added the report.
Macro & Micro Factors:
Monetary policy: Bond markets are probably expecting another rate cut soon, although our economics team thinks that the easing cycle has ended.
Monsoons: The rain data has potential to create volatility, although our research shows that it has limited lasting impact on share prices.Corporate Activity: Morgan Stanley expects more offerings as well as M&A ahead. Our sentiment indicators are pointing to a tactical price or time correction in the market, but global equity market trends will determine this. Correlations across stocks have plummeted to a low, suggesting a big macro trade is in the offing.The Great Diwali Discount!
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