India's all-time high share market sparks talk of further upside for stocks

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Record highs in Mumbai are stoking the enthusiasm of strategists calling for further upside for Indian stocks, with companies poised to take advantage of a post-pandemic economic recovery in Asia through next year and beyond.

Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Asset Management are among a number of prominent names talking up prospects for the country’s shares in recent days. India traders marked Diwali, the Hindu festival of lights, by watching the S&P BSE Sensex Index rally to record highs last week, helped in part by a solid third-quarter earnings season.

About 86% of reporting firms in the benchmark posted a sales beat while more than 70% topped earnings expectations, according to data compiled by Bloomberg. The benchmark is up 10% this month and has narrowed its year-to-date underperformance against the MSCI Asia Pacific Index to about 5 percentage points from over 10 percentage points earlier this year.

After World’s Biggest Lockdown, Profits in India Are Rebounding

“India’s earnings revisions trend has improved sharply and valuations are on the cheaper side of their historical relationship with Asia and emerging markets,” Morgan Stanley strategists including Jonathan Garner wrote in a Nov. 15 note. The firm upgraded its recommendation for the MSCI India Index to overweight, naming it one of the top trades for their 2021 outlook.

India’s economy will benefit from easy global financial conditions as well as increased foreign direct investment following broad structural reforms delivered through 2020, according to the strategists.

Catch Up Rally

Goldman Sachs strategists have also upgraded Indian stocks to overweight, with the market seen as the most sensitive to vaccine optimism. The firm had cut their recommendation to market weight in April amid a nationwide shutdown and rising infections.

“The investment case for India has improved now,” a team including Timothy Moe wrote in a note last week. “We expect a ‘catch up’ laggard rally given the positive newsflow on the vaccine front, which could spur a faster than expected recovery.”

Goldman forecasts real economic growth to bounce back strongly over the next two years, fueling a corporate profits rebound of 27% in 2021 that’s ahead of its projected 23% increase for the MSCI Asia Pacific ex-Japan Index.

The team expects the NSE Nifty 50 Index to hit 14,100 by the end of next year, implying about 10% upside from last week’s close.

Broad Potential

Looking further ahead, JPMorgan Asset Management projects strong long-term average annualized returns for Indian stocks of 8.9% over the next 10-to-15 years.

“We see broad potential in India from a macro perspective,” said Sylvia Sheng, global strategist with the firm’s multi-asset solutions team in a press briefing last week. Bullish factors include population growth as well as room for productivity to grow, she said.

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