Sensex Bear Case Target 22800; Nine Catalysts eyed: Morgan Stanley

Sensex Bear Case Target 22800; Nine Catalysts eyed: Morgan Stanley

According to Morgan Stanley, there is a 10% probability that the government’s policy response will be unenthusiastic and more significant, global conditions will worsen. In such a situation, Sensex earnings growth for the current year will be 10% and the index could go down to 22800 by May.       
 
Brokerage house Morgan Stanley sees these nine catalysts influencing market sentiment over the next six months. 
 
Bihar Election: A victory for the BJP will be taken well by the Market. However, result prediction could prove difficult given the consolidation of opposition parties in Bihar.
 
Legislation: If the GST bill is not passed soon, then the April, 2016 target may not be met. We don’t think a delay of 3-6 months in implementation will upset the equity market considerably. 
 
Government Action: Excepting ongoing changes to make business easy to do, the most important action is government capital spending. 
 
Macro Data: We expect a better growth data in the months ahead and the probability that inflation surprises on the downside.   
 
Next Rate Cut: Our out-of-consensus view of a further 50-75bp in policy rate cuts for F2016 is premised on further weakening in the inflation data. 
 
Earnings: The silver lining is that the earnings pain is concentrated in a handful of companies and sectors. We expect further improvement in September quarter earnings. 
 
Equity Supply: A bunching of supply from the government which had budgeted a doubling of divestment and other source is a risk to short-term equity prices. 
 
Valuations: Absolute valuations are not helping the market call given they are bang in the middle of the range. Relative valuations appear rich.    
 
Global Factors: Global growth, China growth, oil prices, EM News flow and US Fed moves as an indicator of global liquidity are factors to watch. 
 
According to the brokerage, there is a 10 percent probability that the government’s policy response will be tepid and, more crucially, global conditions will deteriorate. In such a scenario, Sensex earnings growth for the current year will be 10 percent and the index could slip to 22,800 by May. 
 
The brokerage sees a 40 percent probability that the policy response could be better than expected, causing interest rates fall and make equities relatively cheaper. In such a scenario, Sensex earnings growth for the current year will be 20 percent and the index could rise to 35,700 by May.