Sensex rally not over yet, bull market still has steam; Morgan Stanley says India will beat other EMs

Bulls may continue to dominate India’s share markets for the next 12 months, albeit at a slower pace of gains, said global brokerage and research firm Morgan Stanley. The current bull market, which started since the bottom made in the last week of March 2020, is believed to have more legs when compared to previous such rallies. “There is return dispersion across bull markets making the average return less meaningful. This one is up 106% — the historical average is 284%. While we see further upside in the immediate 12 months, the pace of gain may slow,” Morgan Stanley said in a report. Sensex and Nifty have doubled since the March 2020 fall and have set fresh all-time highs.

Current rally akin to 2003-2008 bull market

Over the past three decades, Indian stock markets have witnessed six bull markets, including the present one. Apart from the 2003-08 bull market, the average duration of the other four bull markets is 72 weeks. Meanwhile, the current rally is only 64-weeks old yet. “Given our view of a likely new profit cycle, the 2003-08 bull market duration may be the template for the ongoing bull market,” the note co-authored by Ridham Desai, Sheela Rathi, and Nayant Parekh said. The share market rally between April 2003 and January 2008 lasted for 246 weeks (nearly five years).

While the bulls have been running the show in stock markets across the world, India’s performance has been better when compared to other emerging markets. However, the outperformance for this bull market stands at 23% against 52% seen in each of the previous five bull markets. This leads analysts at Morgan Stanley to believe that India will continue to outperform emerging markets over the coming months. 

Valuations stretched?

Many argue that valuations are stretched for domestic stocks now. The note highlights that price-earnings ratio might not be the correct gauge, owing to depressed earnings. “The ongoing bull market started at a similar multiple as historically. The current P/B of 3.6x compares with an average peak of 5.2x,” they said. The P/E ratio, at the start of the current market rally, was higher than the average of the previous bull markets.

The depressed earnings, however, are not to stay. “Earnings and ROE are depressed and, if we are right about the coming new earnings cycle, fundamentals bear considerable upside. Interestingly, thus far, this is the lowest interest rate regime we have had in a bull market,” the note added.

Sectors to bet on

Among sectors, cyclicals have stolen the show so far, with materials, industrials, and consumer discretionary among the top-performing sectors. Meanwhile, consumer staples have been lagging. Performance of financials has also been weak. Banking on the underperformance,  consumer discretionary and financials are the top bets for the next 12 months for Morgan Stanley.