The bull run in the Indian equity markets is intact, said analysts at Morgan Stanley in a recent note.
They expect the S&P BSE Sensex to hit 80,000 levels by December 2023 in their bull-case scenario, to which they have assigned a 30 per cent probability.
From the current level, this translates into an upside of nearly 29 per cent.
For this, while corporate earnings are projected to compound 25 per cent annually over FY22-25, Morgan Stanley expects India to be included in global bond indices, which may result in nearly $20 billion of inflows over the subsequent 12 months.
That apart, commodity prices, including those of oil and fertiliser, are expected to correct sharply.
As their base case, Morgan Stanley sees the S&P BSE Sensex touch 68,500 levels — up 10 per cent from the current levels.
“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,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a report co-authored with Sheela Rathi and Nayant Parekh.
For this, Morgan Stanley has assumed that the effects of the Ukraine-Russia war (elevated commodity costs) do not spill over to 2023, domestic growth continues its strong path, and the US does not slip into a protracted recession.
Back home, the analysts hope for a supportive government policy and the Reserve Bank of India (RBI) to execute a calibrated exit from its tight monetary stance.
Sensex earnings in this scenario are expected to compound 22 per cent annually through 2024-25 (FY25).
Their bear-case scenario (20 per cent probability), sees the S&P BSE Sensex at 52,000 levels amid high commodity prices, aggressive tightening by the RBI and a protracted recession in the developed world.
That said, the Indian markets have been relative outperformers globally since July 2022, against the backdrop of strong flows from foreign institutional investors (FIIs), who put in over Rs 80,191 crore ($10 billion) since then until November 25, NSDL data shows.
As a result, the frontline indices, the S&P BSE Sensex and the Nifty50, have rallied nearly 18 per cent. Morgan Stanley expects the pace of flows into Indian equities — by both FIIs and domestic institutions — to continue in 2023, as well.
“The concomitant effect is that the absolute level of share prices can rise in 2023, after spending the bulk of 2022 in negative territory.
"While we expect the domestic bid on shares to continue and also predict buying by foreign portfolio investors, part of this demand will likely be met by renewed primary market activity.
"Going into H2-2023, market should start factoring in its view on the general election (slated for May 2024) with either outright repositioning or considerable hedging of portfolios,” the report said.
Those at Credit Suisse, too, have started to caution against the rich valuation of Indian equities.
“We recommend investors to remain prudent in their equity allocation strategy and focus on sectors/companies with high domestic exposure as the global outlook remains unfavorable; we believe any sharp correction could provide a buying opportunity.
"We continue to prefer banks, pharma, and sectors that can benefit from lower crude oil prices,” wrote Jitendra Gohil, director, global investment management, wealth management, India at Credit Suisse, in a recent note co-authored with Premal Kamdar.