An up-trending profit cycle, a likely peak in short rates in 1Q 2023 and ebbing global macro risks relative to 2022 make the case for absolute upside to Indian stocks, that said, India’s relative gains may take a breather in 2023, said Morgan Stanley’s Ridham Desai in a note on India’s equity strategy outlook.
Expecting about 10% upside to BSE Sensex in base case scenario, Desai said “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 2H2023, the market should start factoring in its view on the general elections (slated for May-24) with either outright repositioning or considerable hedging of portfolios.”
Indian stock markets today hit fresh highs with both Sensex and Nifty hitting record levels. The overall sentiment was lifted by a sharp fall in oil prices and expectations of Indian economy continuing to chug along at a decent pace despite global headwinds.
“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 BoP, 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,” Desai said.
Emerging markets are likely to benefit from a relatively more benign world vs.2022,and India’s trailing outperformance could take a breather in 1H2023, given relative valuations, he added.
Upside risks, as per Desai, could be: Low FPI positioning could lead to an FPI bid, India’s short rates are likely peaking, domestic bid could strengthen further from an upward revision in equity allocation for retirement funds, earnings could be aided by a capex recovery, and the market is pricing in a much more modest earnings growth outlook than at any other time in 2022.
“Stock picking > macro investing, Cyclicals > Defensives, SMID > Large-caps. Correlations across stocks are off lows, so the market is transitioning to a stock pickers’ one. Overweight (OW) Financials, Technology, Consumer Discretionary and Industrials and underweight (UW) all other sectors,” the note added.
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Read More: As Indian stock market surges to highs, Morgan Stanley’s Ridham Desai sees further upside