The benchmark indices have been under pressure since July, with Nifty giving up the 11,000 levels after hitting a record high of 12,103 at the beginning of June. The Nifty and Sensex have declined over 5 percent each in the last one month. But according to a report by Morgan Stanley, indicators suggest that investors with a bit of patience will likely be rewarded well in the next 12 months.

Share Market Live

NSE

The global brokerage said that the markets are in a buy territory and a V-shaped recovery in share prices will depend on policy action and that policy action has sunk since the Union budget and from a portfolio perspective.

"We are getting to a bottom at share prices, as our valuation and sentiment indicators suggest, but risks remain on the horizon – most pertinent are reflexivity of share prices into the real economy and a slowing global economy. All-in-all, risk-reward favours buying equities, but a V-shaped recovery in stocks depends on actions of policymakers," they noted.

However, Indian equities look attractive in a relative context amid subdued oil prices, global trade tensions and better relative valuations in what is a low-return world, they added. They prefer financials, consumer discretionary and industrials, both large- and mid-caps.

"We continue to back growth at a reasonable price. We believe the way to construct portfolios is to buy stocks of companies with the highest delta in return on capital. We expect market performance to broaden; hence, we also like mid-caps where the forward growth is not reflecting share price performance," they explained.

Strong consumer loan growth and rising real incomes drive will help the consumer discretionary sector in the future. Their top picks include Bajaj Auto, M&M, Maruti Suzuki, and Jubilant Foodworks.

For financials, they said that credit costs may have peaked, driven by the bankruptcy process and a recovery in economic growth, however, recapitalization should help the corporate banks. Non-banks face growth slowdown, but the stronger ones look in a good position and are further helped by the budget announcements, the brokerage added. HDFC Bank, ICICI Bank, IndusInd Bank, SBI, ICICI Prudential, SBI, HDFC, M&M Financial, and Shriram Transport are their preferred stocks.

For industrials, they expect private capex to turn in the coming months as the public capex remains strong. Ashok Leyland InterGlobe Aviation and L&T remain their top picks.

Here's a list of Morgan Stanley's focus list:

The brokerage's June 2020 target for Sensex is 45,000 in the base case scenario. In bear case, the June 2020 target for Sensex declines to 35,000 and bull case target rises to 50,000.

Attractive valuations, low rates, corporate M&A are positives for the Indian stock market, they said, adding that the sentiment is bad, but has been worse on at least three occasions in the past six years (August 2013, December 2016 and November 2018).

Meanwhile, weakness in global growth, consumer demand slowdown in the auto sector, the stress in NBFC space and GDP growth concerns are the key risks.

More rate cuts, broad-based funding for non-bank financials (not just for the highly-rated ones) via PSU banks through the RBI window, immediate PSU bank recap, and clarification of the immediate effectiveness of hike in FPI limit may help the markets to pick up in recent times.

First Published:Aug 8, 2019 11:32 AM IST