Morgan Stanley says investors should prefer midcaps, sees Sensex at 61k by December

Global investment advisory firm Morgan Stanley has said the ongoing consolidation in equities would improve return prospects during the second half of the year.

It has retained its base case year-end target for Sensex at 55,000, an upside of almost 10% from the current levels but has also maintained a bull case target of 61,000 (30% probability), implying a return of around 22%. Whereas the bear case scenario to which it has assigned 20% probability pegs the Sensex at 41,000 levels by December 2021.

“Our unchanged BSE Sensex target of 55,000. This level implies that the BSE Sensex would trade at a forward P/E multiple of 17.5x and a trailing P/E of 21.2, ahead of the 25-year average of 19.7x. This premium over the historical average reflects a higher confidence in the medium-term growth cycle in India. We are overweight on India in a global emerging markets (GEMs) context,” said Ridham Desai, Head of India Research and India Equity Strategist at Morgan Stanley in a report.

The foreign brokerage firm believes that investors should prefer midcaps, followed by largecaps and smallcaps stocks.

Calling it a stock picker’s market, it advised investors prefer domestic cyclicals.

“A stock-picker’s market depends more on earnings and earnings guidance than a macro market. That said, the ongoing quarter will contain some deceleration in earnings growth due to the second Covid-19 wave. We think the market is looking beyond that since it has learned that such disruptions can prove temporary. Our earnings outlooks for F2022 and F2023 are unchanged from where we were at the start of the year,” it said.

Sectors for 2H21

Morgan Stanley believes investors should allocate their money on consumer discretionaries, industrials, financials, and utilities, while at the same time trim allocations to information technology, pharma, telecom companies and energy stocks.

Consumer Discretionary: Valuations look attractive and with real rates likely to be in negative territory through 2021, we expect strong growth in the coming months. Long-term fundamentals are robust underpinned by rising incomes.

Industrials: Strong government CAPEX and a nascent pick up in private CAPEX plus inexpensive valuations drive our overweight.

Financials: With the rate cycle behind us and a long pause likely from the RBI, rate sensitives are likely to outperform. Even as this sector has lost its leadership status, the tactical bounce could be very strong.

Utilities: Another rate-sensitive sector that is also supported by attractive valuations.

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