Indian equities are likely to outperform their emerging market (EM) peers in 2021, according to a latest report by Morgan Stanley.
The brokerage firm has kept its December 2021 target for the Sensex unchanged at 55,000 levels (base case; 50 per cent probability) for now - an upside of around 10 per cent from the current levels.
It believes that in a bull-case scenario (30 per cent probability), Sensex could touch levels as high as 61,000, an upside of around 22 per cent from the current levels, while in a bear case scenario that has a 20 per cent probability, it can go back to 41,000 levels by December 2021.
"Our set of 16 leading indicators and six coincident or lagging indicators suggest an improving market outlook for the second half of 2021. This is a stock-picker's market, with ample alpha opportunity underscored by falling correlation of returns across stocks. Our pecking order: domestic cyclicals, rate sensitives, global cyclicals, defensives exporters and mid-caps, large caps, small caps," the report said.
"India faces two opposing challenges - immediate shortages of vaccine supply and a medium-term problem of convincing people to be vaccinated. At the margin, the equity market will be assessing the shift in vaccine supply as a key input. Our earnings outlooks for FY22 and FY23 are unchanged from where we were at the start of the year," it added.
Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a coauthored report with Sheela Rathi and Nayant Parekh wrote, "Our unchanged BSE Sensex target of 55,000. This level implies that the BSE Sensex would trade at a forward P/E multiple of 17.5x and a trailing P/E of 21.2, ahead of the 25-year average of 19.7x. This premium over the historical average reflects a higher confidence in the medium-term growth cycle in India. We are overweight on India in a global emerging markets (GEMs) context."
Morgan Stanley mentioned that investors should prefer midcaps over largecaps and largecaps over smallcaps, considering the market dynamics. It remains bullish on consumer discretionary, industrials, financials and utilities. It maintained a neutral stance on Materials and Consumer Staples and underweight on Communication Services, Energy, Healthcare and Technology sectors.
The brokerage also believes that the second wave of Covid infections in the country, may have peaked and the markets are now looking at how quickly the wave descends, in addition to how much the vaccination can be ramped up. While corporate earnings are likely to be impacted due to the Covid-triggered lockdown and mobility curbs, markets are likely to look through this disruption.
The analysts also noted that the possibility of a further extension in lockdown, could hurt the overall consumption - more so when the Covid infections have reached rural India.