International brokerage Morgan Stanley has lowered its year-end target for Sensex to 82,000, down from 93,000, amid global uncertainties. The base case target suggests that the Sensex might gain around nine percent from current levels in 2025.
The election cycle, heavy rains in August, and changes in the lunar calendar drove down government spending in the first half of the last fiscal year. However, Morgan Stanley noted that ehese factors have given way to a major pickup in government spending and a dovish RBI, leading to domestic growth recovering.
"However, the US policy on tariffs, the prospects of China's retaliation, and the accompanying uncertainty have led us to reduce our growth forecasts," said Morgan Stanley's Ridham Desai in a report.
While reiterating the bullish view on India, Morgan Stanley cited factors that have helped India outperform in a period of global selloff, though the risk of testing 'multi-month low' remains.
Morgan Stanley's base case level suggests that the BSE Sensex would trade at a trailing P/E multiple of 23x, ahead of the 25-year average of 21x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India's lower beta, a higher terminal growth rate, and a predictable policy environment.
"This level assumes continuation in India's gains in macro stability via fiscal consolidation, increased private investment, and a positive gap between real growth and real rates. Robust domestic growth, slow growth in the US but no recession, and benign oil prices are also part of our assumptions. In our base case, we also assume that the bulk of the tariff news is out," said the report.
On the bullish front, the Sensex could touch 91,000, noted the brokerage, which is still lower than its previous base case target of 93,000 for 2025. According to Morgan Stanley, there is a 30 percent chance of the bull case target being achieved.
The bear case, which has a 20 percent possibility of playing out, suggested that the Sensex could tumble to 63,000 from current levels if oil prices jump past $100/bbl, the RBI switches its stance to tighten monetary policy rates and global growth slows meaningfully.
As a result of the global uncertainties, the main action the Morgan Stanley took was to trim active sector positions across the board. "Our average active position falls from 180bps to 80bps. While the bias remains to buy domestic sectors with a cyclical bias, both overweight and underweight positions stand reduced," said the brokerage, "the RBI has policy space to act to support domestic growth, whereas external-facing sectors could go through multiple months of uncertainty."
Given the market scenario, Morgan Stanley is overweight on financials, consumer cyclicals, and industrials, while remaining underweight on energy, materials, utilities and healthcare.
Interestingly, the brokerage noted given that it is now a stock picker's market, Morgan Stanley has decided to turn "capitalization-agnostic", cutting back its our preference for small and mid-caps over large-caps.
In December 2024, Morgan Stanley has projected a target of 93,000 on Sensex by December 2025 as its base case, representing a 14 percent upside. The bullish scenario was for Sensex to test 1,05,000, while a bearish outlook places it at 70,000, the analysis said in December.
Once the correction comes to an end, Morgan Stanley recently said it expects Indian markets to likely resume outperformance to emerging markets peers in the coming months. India has strong macro stability with improving terms of trade, declining primary deficit, and falling inflation volatility, the brokerage said in February.
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