Morgan Stanley sees Sensex at 50,000 by December 2021, overweight on India

The strong rally in Indian markets from Covid lows has prompted global brokerage firm Morgan Stanley to upgrade its target for Sensex to 50,000 by December next year. Earlier, the brokerage had given a target of 37,300 for June 2021. The brokerage feels the market has not taken into account the upcoming growth cycle and sees more upside to the index.

The brokerage has an overweight rating on India.

Morgan Stanley has also raised FY21, FY22, and FY23 earnings per share (EPS) estimates for Sensex by 15%, 10%, and 9%, respectively indicating between 6% and 7% above consensus estimates. The revised target for the 30-stock index signals it is seen trading at a forward price to earnings (PE) multiple of 16 times.

"Covid-19 infections appear to have peaked, high-frequency growth indicators are coming in strong, government policy action is beating expectations, and Indian companies are picking up activity through the pandemic. Thus, we expect growth to surprise on the upside, rates trough to be behind, and real rates to remain in negative territory for several months," Ridham Desai and Sheela Rathi, equity strategists, Morgan Stanley wrote in a note on November 15.

The global brokerage sees Sensex at 50,000 when the virus situation improves, growth recovery is constant, and asset prices are backed by global stimulus. On the other hand, Sensex is seen falling to 37,000 if the pandemic is carried over to 2021 and recovery in growth hits hurdle with government failing to chart an adequate response resulting in losses in the financial system.

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Morgan Stanley expects small-and mid-caps indices to outperform large caps next year as concentration of market cap and profits may have peaked in line with the growth cycle.

"Return correlations across stocks with the equity market have risen to levels from where they tend to mean-revert. We expect domestic cyclicals to outperform exports, with rate-sensitives and consumers outperforming whereas energy should underperform," said Morgan Stanley.

Since March lows, Sensex and Nifty have staged a robust recovery as hopes for a coronavirus vaccine, strong Q2 earnings, US presidential elections and financial packages for economic recovery in major economies have led to positive sentiment across global markets.

While Sensex has recovered 18,180 points, Nifty has climbed 5,255 points since March 23.

On March 23, Sensex and Nifty logged their highest losses ever after rising number of coronavirus cases in India and the resultant lockdown in a majority of states took a heavy toll on the financial markets. While Sensex lost 3,934 points to 25,981, Nifty closed 1,135 points lower at 7,610.

In November alone, Sensex has gained 4,547 points buoyed by US presidential polls, Q2 earnings, vaccine developments and inclusion of 12 Indian stocks in MSCI index.

Nifty too rose 1292 points this month hitting all time high in recent sessions.

MSCI will include 12 Indian stocks and exclude two others as part of semi-annual index review of its MSCI Global Standard Index. The changes to the index will come in to effect as of the close of November 30, 2020.