Sensex target 50,000: Check Morgan Stanley’s top midcap, smallcap picks, and how to trade

After a dismal first few months of the current year, more and more analysts are turning bullish on Indian share markets. After Goldman Sachs, now global brokerage and research firm Morgan Stanley has raised the targets in its 2021 estimates for Indian equity markets. Morgan Stanley sees a massive 15% upside for the S&P BSE Sensex from current levels by December 2021. “By our estimates, the market will be trading at 16x forward earnings at our new BSE Sensex target of 50,000 in December 2021,” they said in a recent report.

Earlier in June the global investment bank had pinned a target of 37,300 for Sensex by June 2021. In the note co-authored by Morgan Stanley’s Ridham Desai and Sheela Rathi, they add that the broad market, including the small and midcaps, are likely to beat the narrow indices or large caps in the coming year. This is aided by their belief that concentration of market cap and profits may have peaked with the return of the growth cycle. “We also think portfolio returns are more likely to be driven by bottom-up stock picking rather than top-down macro forces, so keep sector positions narrow,” they said.

Bull and Bear case scenarios

In the most likely scenario, where there is stability in the virus situation and a recovery in the economy, Sensex is likely to reach 50,000 points with earnings rising 7% in 2021 and 32% in 2022 with no fresh fiscal program by the government. However, if the virus issue lingers well into 2021 and growth falters with India failing to deliver an adequate policy response the bear case scenario sees Sensex pulling back to 37,000 points.

The Bear case scenario expects the virus situation improving and recovery in growth is sustained along with a global stimulus supporting asset prices. If the government continues to deliver policy including infrastructure creation, ease of doing business, and fiscal consolidation, Morgan Stanley sees Sensex at 59,000 points.

How to trade?

With an improving earnings cycle that has not been priced in, Indian equities look attractive compared to emerging markets. “Thus, they could attract fresh interest in light of an improving earnings cycle and the policy momentum outlined earlier,” the report said. Morgan Stanley’s portfolio strategy advises buying domestic cyclicals and rate sensitives.

Small and midcap stocks are likely to be in focus in the coming year. “Small and midcap valuations are looking attractive relative to GDP and money supply, setting the stage for outperformance versus large-cap stocks in the coming months,” they said. Further the note adds that we may have entered a stock-pickers market implying that portfolio construction is better done bottom-up. 

Key portfolio calls

With a strong domestic macro climate, Morgan Stanley says domestic cyclicals like industrials and cement may outperform exporters like technology. The end of a rate cycle, according to the global brokerage, favours financials and utilities. Morgan Stanley has added 100 basis points financials at the expense of healthcare, adding SBI to its Focus List and removing Apollo Hospitals. Consumer discretionary, industrials, financials, and utilities are the sectors that the brokerage firm is overweight in.