Sensex to rise to 34,000 by June 2018: Morgan Stanley
STREET SIGNS Robust earnings outlook, strong economic growth to drive rally
Where do Indian markets go from here? Up another 9%, says Jonathan Garner, the chief Asia and emerging markets equity strategist at Morgan Stanley.
The investment bank has set a Sensex target of 34,000 for June 2018. Garner cited an upbeat corporate earnings outlook and strong economic growth as reasons for the prediction.
On Tuesday, the benchmark 30-stock Sensex closed at 31,190.6 points, 0.38% lower than the previous close. The gauge has climbed 17.1% since January, trailing only the broader Nifty and Hong Kong’s Hang Seng index.
“We are bullish on the Indian market, In fact, we are overweight India relative to our coverage,” Garner said in a phone interview with Mint. “If you look at the situation for equities globally, it is characterised by very strong earnings growth.”
Garner said he expected the Sensex to deliver 18% earnings growth for fiscal year 2018 on the back of likely synchronised upswings in the infrastructure and consumption sector in India.
“(There is) increasing support from exports, while global trade growth is recovering. We also think corporate capex spending will be rising globally,” he added.
Morgan Stanley’s forecast is easily the most optimistic, even though overall investment sentiment towards Indian stocks is positive. Citigroup Inc., for instance, predicted in a May 31 note that the Sensex would hit 32,200 by March, about 3.2% above current levels.
Foreign investors have (index) (Hang Seng) (FTSE Straits Times) (Shanghai Composite) bought $7.81 billion in Indian stocks this year, betting on growth in Asia’s third largest economy. The optimism has continued despite data released last week that showed India’s economic growth slowed for the fourth consecutive quarter in the three months ended March, mirroring the impact of demonetization on key sectors including construction and financial services.
Gross domestic product growth slowed to 6.1% in the fiscal fourth quarter from 7% in the third, government data showed on 31 May.
Corporate earnings in the March quarter also reflected this. A Mint analysis of the earnings of 2,348 firms, for which comparable data is available for 12 quarters, showed aggregate net sales rose 5.07% from a year ago and net profits after adjustment for one-offs fell 3.7%.
But Garner, like others such as rating agency Moody’s Investor Services, believes the worst may be over. “Now, actually, we are close to a situation where the economy will be firing on all cylinders and strong earnings growth will come through,” said Garner. “Inflation is well contained here, the current account is in balance, bond yields have been trending down. All these are quite constructive.”
Moody’s on June 31 projected India’s growth to accelerate to 7.5% in 2017-18 and 7.7% in 2018-19.
Because of this expected strong earnings rebound, Garner is not concerned about valuations. “Valuations are reasonable. We are seeing 16.5 (times) forward P/E (price to earnings ratio) to June 2018 for India. It is at a premium valuation to EMs (emerging markets), but it is normal range around 25% overvaluation of the EMs,” he said.
Others are not so sanguine about earnings growth. “Earnings revision momentum is still negative (more downgrades than upgrades) and Nifty (fiscal) 2018 earnings growth expectations stand at 15% vs. 18% at the start of the earnings season,” said the Citigroup note cited earlier.
According to analysts, while sales volumes will inevitably grow, profits might not. “A lot is riding on a big turnaround in the fundamentals of the companies. We can only hope that the market is fated for better than Dorian Gray,” said a June 5 note by Kotak Institutional Equities, referring to the eternally youthful hero of the Oscar Wilde book whose portrait showed his true, wretched state of being.