Even as foreign investors pull out sackloads of cash from Dalal Street and the market has given near-zero returns in the last 2 years, Morgan Stanley’s India equity strategist Ridham Desai sees 25% probability of the Sensex hitting the 1 lakh milestone within the next 12 months, with India’s improving macro and earnings cycle underpinning that bullish scenario.
While the 1 lakh print is framed as a bullish but plausible outcome, Morgan Stanley’s base case remains more conservative, with a Sensex target of 89,000 by June 2027 and a 50% probability attached to that trajectory. This implies upside potential of about 15% from current levels and rests on a continuation of India’s gains in macro stability, increased private investment and a persistently positive gap between real growth and real interest rates.
“The Sensex would command a trailing P/E multiple of 23.5x, ahead of the 25-year average of 22x,” Desai argues, justifying a valuation premium through greater confidence in India’s medium-term growth cycle, lower beta characteristics and a predictable policy environment. The base case assumes robust domestic growth, steady global growth, lower oil prices than current levels and a “benign monetary policy”, alongside a supportive primary market where retail flows “keep their nose ahead of supply”.
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Why Morgan Stanley is bullish on India
The strategy playbook emphasises that India is entering a durable growth phase backed by accelerating investment, rising real growth relative to rates and declining policy uncertainty. Morgan Stanley projects the investment-to-GDP ratio climbing to 37.5% over the next five years, supported by capex in energy, mining, defence, semiconductors and data centres.
On the earnings front, the report underscores that the “earnings cycle [is] set to resume”, with Sensex earnings expected to compound at 16% annually through FY29 in the base case and up to 19% in the bull case. “Earnings growth momentum [is] likely turning sharply,” the strategists note, pointing to leading indicators and models that show a strong correlation between macro variables and forward earnings growth. Corporate profits to GDP and ROEs are also forecast to improve, reinforcing the case for higher equity multiples.
India de-rating is cyclical
Despite the recent underperformance of Indian equities versus emerging markets, Morgan Stanley views the de-rating in India’s valuations as cyclical rather than secular. The report argues that concerns over slowing fertility and the impact of AI on India’s services-led export model are “exaggerated”, and instead sees AI as a medium-term opportunity to lift labour productivity from a low base.
India’s market-cap-to-GDP ratio and composite valuation indicators suggest room for upside, with Morgan Stanley’s models implying 10-year annual returns of around 11.6% at current price-to-book levels. “We argue India’s relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse,” the strategists write, noting that India’s share of global profits now exceeds its global index weight by the widest margin on record outside 2009.
Portfolio strategy
Against this backdrop, Morgan Stanley’s recommended sector positioning leans into domestic cyclicals that can benefit directly from the capex and consumption cycles. The firm is overweight financials, consumer discretionary and industrials, while underweighting energy, materials, utilities and healthcare, and maintaining equal-weight in communication services, consumer staples and technology.
“We expect strong consumption growth helped by lower interest rates, lower taxes and better overall income growth,” Desai and co-strategist Nayant Parekh say, justifying a +300 bps overweight to consumer discretionary. Industrials get a similar overweight on expectations of a private capex pickup, and the report flags IT services as a potential “dark horse” as global clients turn to Indian firms to build AI applications and solutions.
What’s the bear case scenario for Sensex?
While the probability of the Sensex touching 1 lakh in the next one year is pegged at 25%, Morgan Stanley also assigns an equal 25% probability to a bear case where the index falls to 66,000. This downside scenario is built around an oil shock, with prices averaging above US$120/bbl, forcing the Reserve Bank of India to tighten policy “to protect macro stability” against a backdrop of meaningful global growth slowdown.
India’s chief risks, according to the report, are largely external – including geopolitical tensions and a weaker global economy – while domestic vulnerabilities include “weak farm productivity, capacity bottlenecks in the judiciary, and embodied AI weighing on labour markets”. Even so, with domestic flows strong, foreign positioning at multi-year lows and India’s fundamentals pointing to a “low beta growth market”, Morgan Stanley believes the risk-reward remains skewed in favour of Indian equities, lending credibility to Desai’s one-in-four call on the Sensex scaling 1 lakh within the next year.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
