Stepping into the second half of 2021, global research and brokerage firm Morgan Stanley says its leading indicators suggest an upside risk in index returns going forward. This has led analysts at Morgan Stanley to maintain their bull-case Sensex target of 61,000. “The market’s ongoing consolidation is improving its return prospects going into the second half of 2021 albeit the immediate triggers pertain to the pace of the likely deceleration of the second COVID-19 wave and improvement in vaccine supply,” a recent note by Morgan Stanley said. The brokerage firm had revised its Sensex target for 2021 after the Union Budget in February.
“Our set of 16 leading indicators and six coincident or lagging indicators suggest an improving market outlook for the second half of 2021,” the report said. The challenge for stock markets, in their view, comes from the waning liquidity and valuation support.
Bull, Base, and Bear case scenario
Largecap index returns are expected to accelerate in the coming months for India, outperforming other emerging markets. The bull-case takes Sensex higher to 61,000. For this target to materialise, Morgan Stanley estimates that the virus ebbs completely, recovery in growth is sustained, and global stimulus supports asset prices. Further, the report added that for Sensex to reach 61,000 the government will need to deliver strong policy including infrastructure creation, ease of doing business and fiscal consolidation.
Morgan Stanley’s base case scenario sees the index at 55,000 by December this year. “This assumes stability in the current virus situation and a recovery in the economy per our forecasts. We expect Sensex earnings to rise 32% in F2022,” the report said. For Sensex to reach these levels, no fresh fiscal stimulus is expected to be launched but continued support from the government on administrative and legislative reforms is anticipated.
The bear case target for Sensex is at 41,000. The situation seems possible if the virus lingers well into the second half of this year and growth falters which is further dealt with no policy response, leading to losses in the financial system. However, Morgan Stanley analysts only see a 20% possibility of this scenario taking place.
In terms of equity portfolio strategy, Morgan Stanley domestic cyclicals, followed by rate-sensitive stocks, global cyclicals, defensives exporters and mid-caps, large-caps, and small-caps in the same order. “This is a stock-picker’s market, with ample alpha opportunity underscored by falling correlation of returns across stocks,” the note said.
(The recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)