Indian stock markets: Pros and cons, according to Morgan Stanley

The Sensex may have hit all-time high last week, but the broader markets have hardly contributed to the rally. Amid ongoing market conditions, global brokerage Morgan Stanley believes Indian stock market is facing pressure from negative trend in emerging markets, rising interest rates, and higher oil prices at a time when electoral uncertainty looms large with general elections 2019 not so far. However, it noted that the large-cap index has support from an improving growth cycle, strong macro stability and local appetite for equities.

According to the global brokerage, following are the factors that may work in favour or against Indian equity market:

What is in favor of Indian equities?

Strong macro stability evident in a positive BoP and backed by a Central Bank that is committed to keeping real rates positive.

A bullish steepening of yield curve, which is at post-2010 highs – the yield curve correlates positively with stocks.

A low and falling beta, which augurs well in a weak global equity market environment as we have seen over the past few weeks.

India's growth is likely accelerating relative to EM. Our work shows that corporate confidence is at a multiyear high and profits are likely to mean revert from below trend.

Strong domestic flows, currently averaging around US$2-2.5 billion a month, which we believe are in a structural uptrend.

Weaker FPI positioning, now at 2011 levels.

What is against Indian equities?

Likely rising crude oil prices, which could put pressure on growth.

Upward pressure on inflation from food price hikes making sure that more rate hikes are coming.

The election cycle, which brings its own set of uncertainties.

Relatively rich mid-cap valuations (even after the recent drawdown).

Equity valuations relative to bonds is at the top end of its range, indicating that the market is pricing in some part of the coming growth recovery.

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Rising equity supply

Talking about the attractive investment avenues, Morgan Stanley said it prefers large-caps over mid-caps. "We like Banks (private corporate and retail), Discretionary Consumption, Industrials and Domestic Materials, while avoiding Healthcare, Staples, Utilities, Global Materials and Energy," it said in the report. 

The brokerage also said that as we approach the 2019 general elections, the market is likely to shift focus on likely outcomes as a key driver for performance.