The Bombay Stock Exchange's (BSE) Sensitive Index (Sensex) can climb as much as 19% even as investors debate whether soaring inflation will eat into growth and lead to earnings downgrades, said Morgan Stanley. Adani Enterprises , DLF and Coal India are top picks and small-cap companies are an attractive lot which can surprise on the upside, Morgan Stanley said. "Indeed, the dispersion in valuations, earnings growth and stock returns appear to be favorable to stock picking," said analysts led by Ridham Desai. "Earnings growth dispersion is high, valuation dispersion has been rising whereas return dispersion has been falling. The bottom line is that the micro environment is appealing for stock picking." Morgan Stanley's Sensex forecast is 22100. It ended at 18503.28 on Tuesday. "India's biggest tail risk is that the MENA (Middle East and North Africa) crisis is prolonged and crude oil prices stay higher for longer," he said. The strategist and head of India equity research believes the market is only 9% away from their bear case level for 2011. "Near term, we think the market is operating in a range of 17500 to 21000. As such we remain buyers of Indian equities with a 12-18-month view. The market is cautiously positioned if our sentiment indicator is a guide," he added. Inflation risks remain on higher commodity prices, says Chetan Ahya, Asia Pacific & India economist at Morgan Stanley. "We believe that prices of global commodities, including crude oil, will be key to the inflation outlook," he said. "However, considering that the cost of capital might stay higher for longer, we see downside risks to our growth outlook -- to the extent of 0.25-0.5% points," says economist Chetan Ahya who forecasts GDP growth to fall to 7.7% in 2012 from 8.6% in 2011. He expects the central bank to hike the repo rate by another 75 basis points. "The market is pricing in slower near-term growth and implying an attractive 14.5% long-term return," says Desai. According to him earnings growth appears to be nearing a trough given the margin compression that has already happened. Return on equity, too, is off the bottom. He favours stock picking in the current environment since he believes the "macro effect" has peaked. He sees more rewards in small- and mid-caps and stocks down the quality curve. Sectorally, Morgan Stanley has shifted from global cyclicals (materials) to domestic consumer cyclicals. They remain overweight on industrials but are cognizant of the downside to capital expenditure.
Source: The economic times
Vivek Agrawal
Summer Intern-Fundamental Analysis
DENIP Consultants Private Limited.
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