Tag: GDP

NEW DELHI: Foreign brokerage firm Morgan Stanley has predicted that BSE sensex is expected to touch the 80,000-mark by December 2023 if India is included in global bond indices which can result in $20 billion of inflows over the subsequent 12 months.
Other factors which can propel sensex to 80,000 points include commodity prices like oil and fertiliser correcting sharply, and earnings growth compounding at the rate of 25 percent annually over FY2022-25.
But India might have to wait until early next year to see its bonds enter the JPMorgan emerging market global index as reports suggest the inclusion has been delayed due to prickly operational issues. According to Reuters, bond settlement rules and tax complexities need to be resolved before the inclusion takes place.
The brokerage firm also sees a 50% chance of the sensex hitting 68,500 by the end of 2023, assuming that the effects of the Russia-Ukraine war do not spill over into next year, domestic growth continues its strong path and the US does not slip into a protracted recession.

“India is likely to have better growth than most parts of (emerging markets), a sustained domestic bid, a relatively strong macro environment plus light positioning by foreign portfolio investors,” said analysts at Morgan Stanley.
Bull market intact: At the helm of India’s outperformance has been government policy, including a structural rise in the domestic equity saving pool, a boost to corporate profit share in GDP and a focus on FDI flows, which raised the share of FDI in balance of payments, allowing India to run monetary policy that is less sensitive to the US Fed, and reduced the equity market’s sensitivity to US growth conditions and oil prices, said analysts at Morgan Stanley.
The brokerage expects profit share in GDP to double from its current level of 4 percent to 8 percent over the next four years, indicating that broad market earnings could compound annually at 20-25 percent.
However, in a bear case scenario, the firm sees sensex dropping to 52,000 if commodity prices remain elevated, RBI tightens aggressively and recession in the US and Europe drag down India’s growth.
There’s a 20 percent probability of this, according to Morgan Stanley.
“An up-trending profit cycle, a likely peak in short rates and ebbing global macro risks relative to 2022 make the case for absolute upside to Indian stocks,” said the brokerage.
Here we decode the key reasons for Morgan Stanley’s bullish view on India:
1. Earnings: Morgan Stanley expects 2023 corporate earnings to be strong, with an improvement in margins led by a durable rise in capital spending and benign material prices. India appears to have multiple sources of capex, including energy transition, the Internet, climate change, production-linked incentive schemes,growing exports, depleted capital stock, infrastructure, real estate and FDI going into the next few years. Rising capex is good for corporate profit margins until the capex becomes unproductive, it said.

2. Market view on 2024 general elections: Given how central policy has been to India’s improving macro and stock market outperformance, the market view on the election outcome is likely to affect stock markets considerably in the second half of 2023.
3. Likely increase in net flow: Morgan Stanley expects a rise in equity issuances in 2023 which should smother some of the bid that is coming from domestic investors. At the same time, given how deep the selling by FPIs has been,FPI buying will return to India.

4. Short rates likely peaking: The brokerage expects the RBI to exit the current rate cycle at 6.5%, or 60 bps above its current level, premised on the fact that inflation is heading lower in 2023. This will likely improve liquidity conditions, facilitate further acceleration in credit growth,and help share prices.

5. Global growth and commodity complex: If the global economy slips into recession, it would not be good news for India, which exports about 20% of its output

That said, since India is gaining share in global exports, the slowdown in global growth is affecting it less than in the past. The commodity complex,especially oil and fertilizer, may have greater impact on India’s macro conditions, given the adverse impact on inflation and,hence, rates and growth. In our base case, global liquidity is likely improving in 2023, led by a peaking of the US dollar, though in a bear case scenario this may turn out otherwise, it noted.

Relative valuations: India’s relative valuations are just off all-time highs and appear to be an impediment to further outperformance

That said, India is likely to have better growth than most parts of emerging markets,a sustained domestic bid,a relatively strong macro environment plus light positioning by foreign portfolio investors.
“Based on our indicator, the market is pricing in much less earnings growth than it was at the start of 2022,” said Morgan Stanley.

Sentiment: The market still does not appear at extremes when measured on flows, holding periods, market breadth. “Our BSE sensex target of 68,500 implies upside potential of 10% to December 2023. This level suggests that the BSE sensex will trade at a trailing P/E multiple of 25x,ahead of the 25-year average of 20x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India,” said Ridham Desai, equity strategist at Morgan Stanley.

So what should investors bet their money on?
“The peaking of short-rate hikes will likely favor non-banking lending businesses, but a recovery in credit growth favors banks, too. Continuing strong domestic growth will ikely drive outperformance of consumer discretionary stocks. Growing evidence of capital spending would likely favor industrials,” said Desai.
What should investors avoid?
Avoid defensives and global cyclicals: A reversal in absolute index returns to the upside would likely be accompanied by underperformance of defensives – consumer staples, utilities and telecom. Slow global growth likely keeps the lid on performance of global cyclicals including energy and materials, he added.
Experts believe small-caps will likely outperform large-caps –the opposite of their call at this time last year.
The brokerage firm also continues to pursue ideas around clean energy spending, defence indigenisation, a new residential property, auto, and air travel cycle, a multiyear credit cycle for financials and life insurance, digital transformation, and market share concentration, plus horizontal growth for discretionary and staple consumption and electric vehicles as key themes for 2023.