Morgan raises Sensex Dec 18 target to 35700

Morgan Stanley sees BSE Sensex ending 2018 at 35700 points, 5%higher than the brokerage's previous forecast of 34000 points due to a "meaningful upside potential" in stocks over the next three-five years. "We don't think the market is pricing in a multi-year growth cycle," Morgan Stanley said in its India equity strategy outlook for 2018.

However, the brokerage believes that absolute return on the 31-stock index may slow in 2018 as global liquidity conditions tighten, but expects India to still outperform its emerging market peers.

The BSE Sensex has surged 26% so far in 2017, aided by strong domestic liquidity and buying by domestic mutual funds. "We do not see significant easing on monetary policy, although there is further risk of higher fiscal spending as we approach elections in 2019," Morgan Stanley said. It has slashed its forecast for Sensex companies' earnings per share growth in 2017-18 (Apr-Mar) by 400 basis points to 12%, while lowering forecast for 2018-19 (Apr-Mar) EPS growth to 23% from 24%. "The earnings recession is coming to an end and we expect aggregate margins to improve in the coming quarters... Profits could surprise significantly on the positive given the low starting point of profit share in GDP," the brokerage giant said. The brokerage said valuations of mid-cap stocks were looking "stretched" as the Shiller price-to-earnings ratio, market capitalisation-to-GDP and equity yield-to-bond yield ratios budged past 2010 highs. "For long-term investors, valuations are still in the comfort zone," the brokerage added.

On portfolio strategy, Morgan Stanley has advised investors to buy stocks of companies with high growth potential that are available at reasonable price in favour of those of quality companies. The Shiller price-to-earnings ratio, named after Nobel laureate Robert Shiller, is a valuation metric which divides the price of a stock by the average of ten years of earnings per share of the company.