Foreign investment bank Morgan Stanley has set a Sensex target of 23,000 by the year-end. It, however, maintained that the two key areas of concern remained the high FII ownership in Indian equities and the upcoming elections and the associated political risk which were also likely to make the markets volatile.

Addressing a press conference, Ridham Desai, Managing Director, Strategist and Head of India Equity Research, said: “Our two major concerns include FII ownership being very high relative to historic figures. It is beyond the safe threshold and poses a risk to the equity markets.

“Look at the way our markets have reacted to news about tapering off of Quantitative Easing (QE). The second concern is that it is an election-year and political news flow will cause volatility in the market. Market will head higher, and we expect more volumes over the next six-month period. Sensex could touch 23,000 by the end of this calendar year.”

The bank is expecting a strong bounce back in earnings over the next 12 months. Desai said: “We see about an 8 per cent growth in earnings heading to late-teens by end of March 2014. Sentiment was improving in April. But it continues to be hesitant at best.”

8% earnings growth

“Earnings growth of eight per cent has been priced in at current Nifty levels. Global liquidity is strong and local liquidity is also showing signs of improvement. But earnings environment is getting tougher,” he added.

As part of its portfolio strategy, the bank is overweight on financials, energy, consumer discretionary, technology, industrials and materials and underweight on the other sectors. It is also bullish on cyclical sectors such as banks and realty rather than defensive sectors such as FMCG and pharma as part of its investment strategy.

Desai believed that barring a few expensive exceptions, valuations were attractive at this point of time especially in mid-caps.

“We are extremely positive on mid-caps but we are being selective about them. Large-caps don’t look overvalued. Valuations are attractive and they are better than fair. Having said that, there are certain pockets which are overvalued.”

Worrisome ownership

“Sentiment is stressed in terms of FII ownership. FII flows should be around 2 per cent of the market-cap, which is considered a safe threshold. Right now it is at 2.5 per cent. By itself it is not a risk to have high FII ownership. It only creates risk when external forces act on it like the ending of QE, which could lead to decline in flows and market volatility,” he added.

manisha.jha@thehindu.co.in

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