stock market
A very exciting and big news has come out for the investors of the Indian Stock Market and Dalal Street. Ridham Desai, managing director and India equity strategist of global financial giant and leading brokerage firm Morgan Stanley, has made a very positive and surprising prediction about the future of the Indian market. In an interview to ET, Ridham Desai said that there is a 25% chance that BSE Sensex can touch the historical figure of 1,00,000 (1 lakh) within the next 1 year. If this happens, it will prove to be the biggest milestone in Indian corporate history and financial market so far.
Will Sensex touch the level of one lakh?
Even though foreign investors are pulling out huge amounts of money from Dalal Street and the market has seen almost zero returns in the last two years, Ridham Desai, India Equity Strategist at Morgan Stanley, feels there is a 25 per cent chance of the Sensex reaching the 1 lakh mark in the next 12 months. India’s improving macro situation and earnings cycle are the basis of this bullish forecast.
Although the Rs 1 lakh figure is considered a bullish but possible outcome, Morgan Stanley’s base case is more cautious. In this, a target of 89,000 has been set for Sensex by June 2027 and 50 percent probability of this has been given. This means that there is scope for an increase of 15 percent from the current level. This estimate is based on improvement in India’s macro stability, increase in private investment and continued positive difference between real growth and real interest rates.
Desai argues that the trailing P/E multiple of Sensex will be 23.5x, which is higher than the 25-year average of 22x.” They justify this valuation premium on the basis of high confidence in India’s medium-term growth cycle, low beta characteristics and predictable policy environment. The base case assumes strong domestic growth, stable global growth, oil prices below current levels and “easy monetary policy”. Additionally, it is also expected to have a supportive primary market where the flow of retail investment continues to exceed supply.
Why is Morgan Stanley bullish on India?
According to the report, India is entering a strong phase of growth due to rapidly increasing investment, rising real growth rate relative to interest rates and reduced policy related uncertainty. Morgan Stanley estimates that the investment-to-GDP ratio will increase to 37.5 percent over the next five years, supported by capital expenditure (capex) in energy, mining, defence, semiconductor and data centres.
On the earnings front, the report indicates that the earnings cycle is about to restart, with Sensex earnings expected to grow by 16 per cent (in base case) and 19 per cent (in bull case) annually till FY2029. Strategists say “earnings momentum is likely to accelerate,” and point to leading indicators and models that show a strong correlation between macro variables and future earnings growth. Corporate profit to GDP ratio and ROE are also expected to improve, which strengthens the case for increase in equity multiple.
Advice on which sectors to bet on?
According to this report of Morgan Stanley, if the Sensex has to move towards the magical figure of 1,00,000, then the sectors with heavy weightage will have to come forward and take command. According to Ridham Desai, investors should keep an eye on the following sectors to take advantage of this bull run:
- Financial and Large Cap Banks: Banking sector has the biggest role in taking Sensex up.
- Domestic Consumption: Companies associated with the growing demand among India’s middle class and rural areas.
- Industries and Infrastructure: Shares benefiting from the government’s Capex (Capital Expenditure) and Make in India initiatives.
India’s de-rating is cyclical
Despite the recent underperformance of Indian equities compared to emerging markets, Morgan Stanley views India’s valuations as cyclical rather than long-term (secular). The report argues that concerns over declining fertility rates and the impact of AI on India’s service-based export model are “overstated”, and instead sees AI as a medium-term opportunity to increase labor productivity from a low base.
India’s market-cap-to-GDP ratio and overall valuation indicators suggest upside potential, and Morgan Stanley’s models suggest 10-year annualized returns of around 11.6 per cent at current price-to-book levels. “We argue that India’s relative down-rating is cyclical and has the potential to reverse as growth picks up,” the strategists wrote. He also said that India’s share of global profits is now higher than its weighting in the global index, at a record level since 2009.
