Mumbai: As the markets scaled record highs in May, sharp rise in commodity prices may pose a threat to the potential upside.
Morgan Stanley, in a report on 8 May, said the growth cycle is turning and this could be beginning of a new growth cycle if few factors don’t go wrong.
“The reasons why I could be wrong include a sharp rise in commodity prices, steep negative near-term growth impact from goods and services tax (GST) implementation and global risk off,” said managing director Ridham Desai in the report, co-authored by Sheela Rathi.
According to Morgan Stanley, “Volatility is at multi-decade lows and correlations across stocks have plummeted to a low, both suggesting a big macro trade is in the offing. Return correlations with global equities remain high. If a global correction ensues, the index could easily give up 5-7%.”
However, the global financial services major also added that earnings could compound at 20% over the next five years and if growth cycles are accompanied by an expansion in multiples, the Nifty is likely to triple in the same period.
“Compared to emerging markets, India looks rich but then return on equity (ROE) is gapping higher. The Sensex is still in buy zone versus local bonds but midcap valuations look stretched. Valuations are useful to make a market call only at extremes which is not the case at the moment,” Morgan Stanley said.