Under the best situation, Sensex will touch 20,340 by 2014: Morgan Stanley

Morgan Stanley has also listed six key drivers that will determine where the markets will be headed along with their views

Morgan Stanley expects Sensex to hit 25,600 as the best case scenario and 17,000 as the worst-case scenario. Morgan Stanley is bullish on information technology and bearish on banks.”


However, for two reasons forecasting Sensex was a difficult call to make. Firstly, the Indian elections next year is approaching and it is difficult to predict the outcome. The second is there is uncertainty on the policy front, whether government will do anything at all to get things moving. According to Morgan Stanley, “the market could gyrate around election outcomes and, obviously, we cannot forecast the election result with any confidence. What we can do however, is lay down the framework and likely drivers for equity share prices. All is not lost for investors since we still think there is money to be made in picking stocks across styles and sectors.” It has identified six factors that will determine the stocks to buy.

Indian elections: Morgan Stanley feels that this time the election will be different that ones in the past, particularly, because two of the largest parties, the Indian National Congress (INC) and the Bharatiya Janata Party (BJP) do not have a deep impact. However, Morgan Stanley believes says that the BJP-led NDA is gaining at the national level. The rise of regional parties has made it difficult for a single party mandate. Public expenditure tends to rise prior to elections. Congress has passed the Food Security Bill and subsidies.

Macro stability: India suffers from twin problems of fiscal and current account deficits. It needs to address these. This has been a recurring theme for a while. However, if the twin deficits decline than equities will prevail. Similarly, if oil prices fall, equities will do well. If yield curve is flat, then growth outlook remains tepid.

Growth:  Morgan Stanley expects a long drawn out recovery even though there are some positive signs of “bottoming out”. Here, there are some conflicting signals, some positive, some negative.

Morgan Stanley makes the following observations that Indian retail investors need to watch out for in their stock market call:

  1. The gap between the fiscal deficit and the current account deficit influences margins – it is rising into the next twelve months and this is positive for margins
  2. M1 growth leads revenue growth by about six months and is suggesting sluggish top line growth for corporate India
  3. Its proprietary indicator is pointing to bottoming of earnings growth but a sluggish and long drawn recovery
  4. High downward (analysts) revisions is a contrarian signal for forward equity returns; currently suggesting neutral returns
  5. The consensus has lowered estimates but may have to cut more

Liquidity: At the moment, Morgan Stanley is bearish on the liquidity front. It feels that liquidity scenario is tightening as the US economy improves, and therefore, is in “negative delta” territory. Refer to the two graphs below made by Morgan Stanley using their proprietary indicators.


The first one shows the relationship between Indian economy and the US economy, in terms of “delta”. For Indian equities to do well America must underperform. The second graph shows that the liquidity indicator has rebounded from bullish territory. Morgan Stanley says, “The indicator has fallen from its July 2012 high of 5.3% to 3.5% – below 4% which signals maximum bullishness for (Indian) equities but above 2% – a level which tells us that equities do not have global liquidity support.”

Market sentiment: Morgan Stanley believes that stock market sentiment at the moment is neutral, neither positive to warrant a buy nor negative to warrant a sell. The report says, “In the current macro earnings and valuation construct, we prefer depressed (stock market) sentiment as a threshold to buy (Indian) equities. The biggest problem for equities is that tail risks are not in play.” However, it realises that volatility has risen and this is not good for investing in general.


Stock market valuations: Morgan Stanley says that the Indian stock markets appear “attractive” on the basis of price-book (PB) as well as price-earning (PE) ratio, but cites it is not “cheap”. However, it feels that yields are an important indicator at the moment and more crucial than PB or PE ratios. The note says, “When the gap is rising, the market does not worry about earnings or book. Indeed, when real rates are rising relative to GDP growth, earnings growth is likely to be tepid. In such an environment, the Indian stock market worries about how equities trade relative to bonds. This is logical because the earnings outlook is uncertain and therefore relative yields matter.”


According to Morgan Stanley, “our economist is forecasting weak industrial growth in the coming months and history tells us this warrants a rising real equity yield (i.e., inflation or share prices or both need to fall).”



Suiketu Shah

3 years ago

How often MS changes their view every few months!Arent they the same company who have sold to SChartered?

India: Current account improves on sharp fall in gold imports

With growth bottoming out and a mild recovery likely in FY15, Nomura expects a slow rise in imports for India next year with the CAD estimated at 3.2% of GDP

The Reserve Bank of India released the quarterly balance of payment data that showed a sharp fall in the current account deficit (CAD) to 1.2% of GDP in third quarter (Q3) from 4.9% in Q2, mainly due to better exports and lower gold imports, but the capital account also moved into a deficit due to outflows in portfolio debt, short-term trade credit and other capital.


According to the data, Nomura said, the worst in terms of the quarterly balance of payment data should be behind us. "A seasonal pick-up in imports will likely widen the CAD again in Q4 (October-December), but with the Q3 numbers in line with our expectations, we maintain our FY14 (year ending March 2014) CAD estimate at $45.5 billion or 2.5% of GDP. Going forward, with growth bottoming out and a mild recovery likely in FY15, we expect a slow rise in imports next year with the current account deficit estimated at 3.2% of GDP in FY15," a research report from Nomura said.


India's CAD narrowed sharply to $5.1 billion or 1.2% of GDP in Q3 2013 from $21.8 billion or 4.9% of GDP in Q2 2013. The improvement in Q3 was mainly due to a sharp contraction in the merchandise trade deficit as exports accelerated (11.9% y-o-y in Q3 from -1.5% in Q2) while imports contracted (-4.8% y-o-y from +4.7%). The sharp improvement in exports is mainly led by the textiles, leather and chemical sectors, while the import slowdown reflects the clampdown on gold imports $3.9 billion in Q3 versus $16.4 billion in Q2 as well as weak domestic demand. The invisibles balance moderated to $28.1 billion in Q3 from $28.7 billion in Q2, as better financial services exports offset a flattish trend in remittances and higher investment income outflows on equity and investment fund shares, the research note says.


Nomura said, even as the CAD corrected sharply, the net capital account of India swung into a deficit of $5.4 billion in Q3 2013 compared with a surplus of $20.5 billion in Q2. It said, "Foreign direct investment (FDI) inflows – a stable component – remained strong, but portfolio outflows (largely debt), outflows on short-term trade credit (reflecting lower imports) as well as outflows on other capital led to net capital outflows. Overall, the balance of payments (BoP) recorded a deficit of $10.4 billion in Q3 compared with a marginal deficit of $346 million in Q2."


Hero MotoCorp in JV with Italy-based Magneti Marelli for powertrains

Hero MotoCorp and Magneti Marelli would invest $8.5 million in three years in their JV HMC-MM Auto to produce new gen powertrains in India

Hero MotoCorp, the country's largest bike maker on Tuesday said it has partnered with Milan (Italy) based Magneti Marelli for the manufacturing new generation powertrains through a joint venture in India.


Both companies will be investing $8.5 million in the joint venture — HMC-MM Auto Ltd — over the next three years and around $27 million over the next 10 years, Hero MotoCorp said in a regulator filing.


Pawan Munjal, managing director and chief executive of Hero MotoCorp told reporters, “We have decided to form a joint venture with Magneti Marelli for next generation fuel injection systems...a total equity injection of $8.5 million in the ratio of 60:40 will be injected in the joint venture over a period of three years”.


He added that the joint venture company would start manufacturing by the end of 2014 and is targeting $200-million turnover in the next ten years.


Hero MotoCorp will hold 60% in the joint venture, while the Italian firm will hold the rest. The joint venture would also be open to supplying components to other manufacturers as well, Munjal said.


Hero MotoCorp has already forged alliances with the US-based Erik Buell Racing and Austria’s AVL to enhance its R&D capabilities.


HeroMoto closed Tuesday marginally down at Rs2048 on the BSE, while the 30-share Sensex also ended the day marginally lower at 20,854.9.


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