9
Indian equity market may deliver better returns in 2019 only if Indian electorate does not deliver a shock verdict in the forthcoming general elections by electing a fragmented coalition, Morgan Stanley warned on Wednesday, a day after the ruling BJP suffered a big jolt in elections to four states.
The global brokerage sees Sensex at 42,000 by December 2019 in the base case, with a 20 per cent and 25 per cent upside in rupee and dollar terms.
The BSE Sensex hovered around 35,500 in the afternoon trade on Wednesday.
The brokerage said valuations of Indian stocks appear to be in mid-cycle compared with fundamentals, which seem to be coming out of a trough.
“Market sentiment or psychology looks depressed,” it said.
“We prefer to use price-to-book as a valuation metric versus price-to-earnings, given how depressed earnings are relative to trend.
Valuations could head either way in the short term depending on factors other than fundamentals such as India's election outcome and global events,” Morgan Stanley said.
The brokerage prefers banks, discretionary consumption and industrials stocks from both largecap and midcap segments.
However, it is underweight on consumer staples, technology, healthcare, materials and utilities and neutral on energy and telecom.
In a bull case scenario, with 30 per cent probability, Sensex could touch 47,000 by December 2019 while in a bear case scenario, with 20 per cent probability, it could sink to 33,000, the brokerage said.
Morgan Stanley says macros are driving stocks at present, rather than idiosyncratic factors.
Foreign portfolio investors have been net sellers of Indian stocks in 2018 for the first time since 2011.
They have offloaded shares worth Rs 31,408 so far this year.
Last, they had recorded net outflows in a calendar year was in 2011 at Rs 2,714 crore.
Their net inflows stood at Rs 49,729 crore in 2017, Rs 20,566 crore in 2016, Rs 17,806 crore in 2015 and Rs 97,069 crore in 2014.
“FPI flows have made a cycle low, and with India ownership in the average emerging markets portfolio down to a seven-year low, there is a good case for a turn in FPI flows in 2019,” the global brokerage said.
