Selective buying in heavyweight stocks took the benchmark BSE Sensex to an all-time high level last week.
However, most of the stocks in the 30-share index are still giving negative returns on a year-to-date basis. The selling pressure has been severe in midcap and smallcap stocks.
Headwinds in the form of weak emerging markets, rising rates, higher crude oil prices, election year worries and relative rich valuations have mainly impacted sentiments on Dalal Street this year.
Global brokerage Morgan Stanley, which estimates Sensex to hit 36,000 by June next year in base case, believes the largecap index has support from an improving growth cycle, strong macro stability and local appetite for equities.
“We expect Sensex earnings growth of 5 per cent YoY in F2018, 23 per cent in F2019 and 24 per cent in FY2020,” the brokerage said in a report.
In a bull case scenario, it sees Sensex at 44,000 and in bear case at 26,500.
Factors favouring the market
The global brokerage highlighted the factors that are looking favourable for the market. They include macroeconomic stability evident in positive BoP and backed by RBIs commitment to keeping real rates positive.
A bullish steepening of yield curve, which is at a post-2010 high, correlates positively with stocks and low and falling beta, which augur well in a weak global equity market environment.
In addition to this, Indias growth is likely accelerating relative to emerging markets. “Our work shows corporate confidence is at a multi-year high and profits are likely to mean-revert from below trend. Strong domestic flows, currently averaging around $2-2.5 billion a month, are in a structural uptrend,” Morgan Stanley said.
The brokerage prefers largecaps to midcaps and like sectors, including banks (private corporate and retail), discretionary consumption, industrials and domestic materials, while avoiding healthcare, staples, utilities, global materials and energy.
The brokerage further says crude oil prices remain a key risk to equities given its ability to cause pain to fiscal deficit and, therefore, growth. It sees strong growth in 2018 and 2019 driven by consumption, exports, government spending and a nascent recovery in private capex.
Morgan Stanley said equities do not look compelling compared with long bonds. Indias recent outperformance has lifted relative valuations above average. “Our composite valuation indicator suggests low double-digit index returns in the coming 12 months,” it added in a report.
Stocks in focus
Bajaj Auto, Mahindra & Mahindra, Maruti Suzuki, Zee Entertainment, Titan, ITC, ITC, RIL, Bharat Financial, HDFC Bank, ICICI Bank, IndusInd Bank, M&M Financial, Shriram Transport, Dr Reddys Labs, Adani Ports, Havells India, Asian Paints, Ultratech Cement, UPL and Infosys are among the stocks on Morgan Stanleys focus list.
Factors against domestic equities
The global brokerage said a likely rise in crude oil prices can put pressure on growth, while upward pressure on inflation from food price hikes indicate that more rate hikes are coming. The election cycle, which brings its own set of uncertainties, relatively rich midcap valuations (even after the recent drawdown) and high equity valuations relative to bonds, which indicates that the market is pricing in some part of the coming growth recovery, are some of the factors looking against Indian equities.