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Big bet on India! Morgan Stanley sees Nifty | Bonaz Capital

It can’t get bigger than this for investors and traders. Morgan Stanley predicts Nifty to triple in next 5 years to hit Mount 30K while in the short term, it sees Sensex hitting 34000 by June 2018.

“If you remember between 2003-2007 Nifty earnings compounded at 39 percent and the index was up 7-fold, we expect earnings to compound by 20 percent in the next 5 years which could take the index towards 30,000. These are very modest estimates,” Ridham Desai, MD, Morgan Stanley said in an interview with CNBC-TV18 on the sidelines of 19th India Summit.

One big reason behind the estimates is profit share to GDP is close to all-time low, and we should not forget that it is just a cyclical number and it tends to recover.

Many factors will contribute to push profit share to GDP which includes a recovery in consumption, real wages are turning, exports are picking up, and government infrastructure is at an all-time high. The only missing piece is private capex, but that should also recover by next year.

“We are in the midst of a cyclical recovery in the economy which is good for earnings. The market will not go up in a straight line but it is safe to assume that it is a well-entrenched bull market, and there is considerable more upside for the long-term investor,” said Desai.

For somebody who is looking for a 3-6 months perspective, there will be a lot of problems as valuations look stretch, but that should not worry long term investor.

“Valuation are not my concern, although it looks stretched in the small and midcap space. PE multiples will look loft at current levels because earnings look depressed. But, if we normalise earnings, PE multiple may not look that rich. Therefore, I look at price to book, India close to its long-term averages,” said Desai.

He further added that if we look India relative to US markets, its valuations are just off the 2008 lows which tells us how rich the valuation are. But, relative to emerging markets, the valuations are above average which is justified because of India’s superior growth and rising return on equity (ROEs).
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What will take the rally higher?

One sector which will take the rally is financials, followed by consumption stocks.ina000003197

“It looks like investors will underestimate consumption in the country and the reason is the fundamental change which is happening in the households psychology. There is cultural shift which is happening as more and more people in their 20s are borrowing money which advances demand in a meaningful way,” said Desai.

The per capital income is also going higher which should also fuel demand for non-food consumption. In the financials, Morgan Stanley expects a lot of disruptions which could come from technology or regulations.

But, it looks like the state-owned banks will lose market share and hence they are more trading plays and not investment plays.

“We like NBFCs because there is a disparity in valuations as some of them have turned quite attractive and have fallen to 2x book, while others trade at 6x book,” said Desai.

GST Could Be Trigger For Market To Correct:

In the short term, goods & services tax (GST) could trigger some correction in the market, said Desai. Why?

Morgan Stanley did a survey of micro and small manufacturing and Services Company recently which showed that almost half of firms survey said that they are not prepared for GST launch on July 1.

In fact, 90 percent of them have expressed a desire for training. Hence, there is a possibility that when GST get launched, we face some amount of disruption on growth.
“The market could react negatively to this and if this gets combined with a global event then you could get a drawdown on Nifty in the range of 5-10 percent,” said Desai. This is not the time to short this market.