It expects earnings growth to be 12.7% in 2014-15
Morgan Stanley Research, in its note on the stock market, is trimming its broad market earnings growth forecast for F2014 to -6% from 12% and is introducing an estimate of 5% for F2015. It has cut its Sensex earnings growth estimates from 10.5% to 4.1% for FY2014 and from 19.0% to 12.7% for F2015. Morgan Stanley has issued a new 12-month forward Sensex target of 18,200.
There is however, a 35% probability of a bear market scenario and hence, a 14% fall in the Sensex. These forecasts are shown in the chart below:
The research note suggests that RBI will reaffirm that high rates will linger (via a repo rate hike, for example) and the government needs to endorse fiscal consolidation (which could be at risk – a steep diesel price hike could be a good change). Both agencies are impeded; the former by the state of growth and the latter by the political cycle. Sans policy measures, the market will be punitive with prices (especially the Indian rupee) forcing macro rebalancing. In time, higher public savings and real rates will bring down the current deficit, forecasts Morgan Stanley.
Morgan Stanley’s (MS) research note also evaluates as what the stock market is pricing in. Its valuation template is the equity yield minus short-term yield as in 1998. A negative gap implies the market is not cheap. The market is pricing in 6M (six months) forward 9% nominal IIP growth (MS estimate 4%) and -5% one-year forward earnings growth (versus MS -6% F14 estimate) and it offers a 5.8% risk premium (below MS 6% fair level estimate). The problem is duration and not just the depth of price correction, concludes the research note. This means that it will take a long time for market cycle to turn up.
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