The conditions he states for this to happen, which he believes has a 30 per cent probability, are:
- Inclusion of India in global bond indices, resulting in near $20 billion inflows over 12 months
- COVID-19 does not resurge,
- Oil retraces its recent rise quickly,
- RBI remains dovish for longer, and
- Earnings growth compounds 25% annually over F2022-24
In the base case, for which he sees a 50 per cent probability, he believes Sensex will hit the 62,000 level by year-end, meaning a potential upside of 16 per cent by December 2022. Though this target is 11 per cent lower than its previous target.
“This level means 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 higher confidence in the medium-term growth cycle in India,” he said.
In a bear case, for which there is one in five probability, Sensex may slide to 45,000.
Profit cycle intact
Despite near term margin pressure due to rising raw material costs, Morgan Stanley analysts believe the new profit cycle is intact, and they expect earnings to compound at 22 per cent annually (24 per cent previously) over the coming two years.
Desai and his colleagues said sentiment indicators are approaching the buy zone for the first time since the Covid-19 outbreak. “Implied volume and market breadth, among other indicators, are suggesting the market is likely to find a floor sooner than later. That said, a rise in domestic policy rates may bring another bout of volatility beyond geopolitics,” they added.
Nonetheless, the Indian market has shown exceptional resilience compared to its emerging market peers. Desai has observed that low correlations across stocks signal a market-driven by macros (in contrast to stock picking), warranting wider sector positions.
“In defensives, we double upgrade technology and go underweight in consumer staples (from equal-weight) and stay underweight in healthcare. Within cyclicals, we are overweight on financials, consumer discretionary and industrials and underweight on utilities (down from overweight), energy and materials (underweight increased). Given the broad market correction, we are size agnostic versus our previous preference for largecaps,” he said.
