Morgan Stanley sees Sensex at 30,000 in 18 months

A significant upside awaits the market over the next year-and-a-half, Morgan Stanley would have us believe.

The Sensex, the benchmark index for the Bombay Stock Exchange, could go up by over 65% by the end of 2012, it said in a report on Thursday.

The report is based on a model that forecasts market movements on the basis of valuations and interest rates.

“Over the next 18 months, the market is heading for a substantially higher level, with the Sensex potentially breaking 30,000,” Ridham Desai, Sheela Rathi, Utkarsh Khandelwal and Amruta Pabalkar wrote in the report dated May 18.

The model predicts a correction shortly afterwards, which would ultimately result in a compounded annual growth rate of 8.3% over the next three years.

Experts believe the chances of Sensex hitting 30,000 would depend on how the bottomlines fare over coming quarters and the prevailing interest rate scenario.

“Earnings are expected to grow at around 20-22% for Sensex companies, which would put the earnings per share (EPS) for next year at Rs1,200. There would have to be an upside surprise on this number and the liquidity situation would also have to be favourable,” said Naveen Fernandes, head - institutional broking at K R Choksey Shares and Securities.

The Reserve Bank of India has adopted an aggressive stance of increasing interest rates in a bid to control inflation. This reduces the amount of liquidity in the markets, capping the possibility of an upside caused by money pouring into the capital markets, he said.

“Over the short term, we expect to see some pressure on earnings. Inflation and interest rates will also be keenly watched. We will be keeping an eye on the progress on reforms after that,” said Naresh Kothari, president, Edelweiss Capital.

The model also predicts a grim outlook for the next three months, predicting a period of correction, which seems to be borne out by foreign investor preferences, according to a recent survey.
India is among the least popular countries among emerging markets ,according to a Bank of America Merrill Lynch report authored by Michael Hartnett, Michael Penn and Jacky Tang. The country ranks with Chile and South Africa among the least favoured nations in the emerging market mix.

Foreign institutional investors have been net sellers by Rs3,230 crore since the beginning of the financial year.

The Sensex has dropped 11.54%, or 2368 points, in the same period. It closed at 18141.40, up 0.31% on Thursday.