Mumbai: Morgan Stanley is bullish on the prospects of Indian stock market and expects corporate earnings to recover over the next one to two quarters, said Ridham Desai, head of equity research and India equity strategist at Morgan Stanley India Co. Pvt. Ltd.

“Growth is improving, inflation is going down. So, that is good for equities," said Desai, adding that he expects 18% earnings growth for the broader market in 2015-16.

Desai added that improved earnings will drive the upside in the Indian equity markets, which are down 3.4% since the start of 2015. India has the highest overweight in the brokerage’s emerging markets portfolio. Morgan Stanley has a 12-month Sensex target of 32,500 points, Desai said at a press conference.

BSE’s 30-share Sensex closed 0.16%, or 41.84 points, lower at 26,481.25, while National Stock Exchange’s 50-share CNX Nifty ended 0.27%, or 21.75 points, lower at 8,022.40.

“We find valuations on an aggregate basis far more modest, than they were three-four months ago. We think equities should resume their uptrend in few weeks or over the course of the next few months," said Desai.

Industrials, private sector banks and discretionary consumer goods firms are sectors that Morgan Stanley is positive on, said Desai while adding that they are choosing to stay away from investing in state-owned banks and materials.

Morgan Stanley is also betting on a revival in domestic investor interest in the India markets. The firm expects to see domestic inflows of $300 billion into the equity markets over the coming 10 years compared to $50 billion invested over the last 10 years.

“Over the next 12 months, you will be surprised how much domestic investors will buy. If you are looking at flows, the debate in the marketplace should be not about what FIIs are going to buy. It should be about what domestic investors are going to buy," said Desai.

Despite talk that investors are disappointed with the performance of the Narendra Modi led government in its first year, Desai said the government’s track-record has been good.

“I think its been very good. He has managed to get inflation down, and get the capex cycle going. It couldn’t have been better," Desai said on the sidelines of the conference.

“The only thing they have not articulated so far is the fixing of the SOE (state-owned enterprise) banks," said Desai, adding that a plan to recapitalize these banks or a plan to help them tackle bad loans is needed.

While shares of high-debt companies like Jaiprakash Associates Ltd and Unitech Ltd have been under pressure in recent weeks, Desai said that credit quality across the corporate sector has improved.

“If you look at rating agencies, credit upgrades are exceeding downgrades by a factor of 2. So, there’s a vast improvement is the broad market’s credit position," said Desai

“As far as the stock markets are concerned, the markets hate financial leverage for now. I don’t think that is changing in a hurry," he added.

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