Why Morgan Stanley Has Given Sensex Target of 50,000 Points Despite COVID-19

If you have an investment in Indian equities, here is good news for you.

The benchmark index of the Bombay Stock Exchange, Sensex, is scheduled to hit 50,000 points by December 2021, according to a research note by Morgan Stanley. The note states that it remains overweight on consumer discretionary companies, industrials, utilities and financials; neutral on communication, healthcare, materials and consumer staples and underweight on energy and technology. Further, it expects the market to be trading at 16 times the forward earnings at these levels.

These predictions are occurring as Indian equity indexes have reached all time highs. Sensex is currently at 43,952 points at the close of trading on November 17. This gives the index a little more than 12 months to reach to this mark. Morgan Stanley's earlier predictions stated that Sensex would reach 37,300 points till June 2021, which the index has already crossed.

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"We remain in a bull market that started in March, and even though one should expect corrections along the way, the equity market may have more legs before it tops out. We raise EPS estimates and index target", the report says.

In 2007, they had estimated that markets would reach 50,000 points by 2021. Despite events like the 2008 financial crisis, demonetisation and COVID-19, the markets seems to be inline with this trajectory.

Base case, they estimate with 50% probability that the market will reach 50,000 points assuming stability with respect to the virus in the current situation. Bull case, as they estimate with 30% probability that the market will reach 59,000 points if the virus situation improves drastically, the dollar weakens to enable capital flow in India and prices are supported globally. Bear case, with a 20% probability, they estimate the market to be at 37,000 points due to the virus scenario exacerbating and if the government does not give an adequate response.

The report has attributed its call forecast to the following 4 features:

1. COVID-19 infections have likely stabilised, and another national lockdown is not expected.
2. High frequency indicators like railway freight, GST collections, weekly unemployment and power demand are all showing signs of recovery
3. The surprising strength of government policy
4. Response from Indian companies

Other brokerages have projected a growth in equities too. Nomura has pegged NIFTY, the benchmark index on the National Stock Exchange to touch 13,640 - 14,100 by December 2021. Goldman Sachs too has predicted NIFTY to be 14,100 then. NIFTY closed at 12,874.20, end of trading November 17.

Why have stocks risen despite COVID?

Going into March, global stocks crashed as economies around the world went into lockdown. But markets since then have recovered, despite metrics like unemployment still being high and predictions estimating mostly all economies around the world being poised to show an economic contraction.

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This dichotomy is due to the mentality of the market. It is factoring in a boom over the next couple of years, thus paving the way for more demand for purchasing equity in the market. Another factor contributing towards the rise is due to the fact that many households have decided to save during the pandemic, and use equities as a tool for investment. The rise in Indian indices correlates with a record opening of demat accounts. From April to September, 63 lakh new demat accounts were opened.

See why the stock markets are surging during a slowdown here.