Foreign brokerage Morgan Stanley expects India's stock market benchmark BSE Sensex to hit 74,000 by December 2024, implying an upside potential of 14%.

"In our base case, we assume continuity in a government with a majority mandate resulting in stable policy, the RBI executes a calibrated exit from its current hold stance, robust domestic growth, the US does not slip into a protracted recession and benign oil prices," the brokerage says.

The base case scenario of the Sensex hitting 74,000 has 50% probability, according to Morgan Stanley. This level suggests the BSE Sensex will trade at a trailing P/E multiple of 24.7 times, ahead of the 25-year average of 20 times, says Morgan Stanley. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, it says.

Morgan Stanley forecasts the BSE Sensex earnings to compound 21.5% annually through the financial year 2026.

In the bull case, which has 30% probability, the BSE Sensex is expected to cross the 86,000 mark, according to the brokerage. "In addition to the above, oil prices dip into the $70s or below resulting in lower domestic inflation and deeper rate cuts from the RBI, the US growth cycle renews with global share prices responding with a strong up move and bond flows surprise to the upside. Earnings growth compounds 24% annually over F2023-26E," it says.

In the bear case, which has 20% probability, the BSE Sensex is expected to drop to 51,000. It is likely to happen if India's elections deliver an unclear mandate with a change in government, oil prices surge past $110 per barrel, the RBI ends up tightening to protect macro stability and a US recession leads global growth lower, says the brokerage.

On portfolio strategy, Morgan Stanley says domestic growth is likely to stay strong with benign inflation - which historically has been a perfect combination for domestic cyclicals. "Growth is likely to be capex driven and accompanied by improving credit availability. Rates have peaked, albeit may not come down significantly given growth impulses. This sets the stage for outperformance for financials, consumer and industrial cyclical," it says.

"Unless election outcomes prove unfavourable for markets, defensives including consumer staples, utilities, healthcare and telecoms are likely to underperform," says Morgan Stanley, adding that slow global growth likely keeps a lid on the performance of global cyclicals, including energy and materials.

Unlike last year, large-caps are likely to outperform small and mid-caps, it says.

"The US Fed has not firmly signaled an end to its own hiking cycle. This implies that the RBI is likely to hold its stance. It also means that short rates in India have peaked in mid-2023. If oil prices drop, it may create room for lower domestic fuel prices and may lead to headline CPI moving into RBI's comfort zone of circa 4%. On the flip side, strong domestic growth could create a floor on core inflation. While we expect the RBI to cut rates in the middle of 2024, the rate cycle is likely to be a shallow one given the domestic growth impulses," the brokerage points out.

In the short run, the state election results in December for five states could create volatility, especially if the BJP loses a majority of those states, according to Morgan Stanley. The brokerage says the key to watch in the 2024 general elections is if the opposition alliance, called I.N.D.I.A., can put up a credible seat-sharing arrangement, which polarises the general elections and reduces the predictability of the outcome in May next year.

The brokerage expects FY24 and FY25 earnings to be strong, with an improvement in margins led by a durable rise in capital spending and benign material prices.

mid caps

Sensex to hit 74,000 by December 2024: Morgan Stanley