Morgan
M O R G A N S T A N L E Y R E S E A R C H
BSE Fair Value: 13651
An unprecedented credit crunch in the
Although the long-term story looks very attractive and many in the market have yet to recognize it, the challenge for longterm investors is that market’s price action has compressed the long-term returns being implied by share prices.
On our residual income model, the market is implying a 10-year compounded annual return of less than 12%, or an equity risk premium of under 4% compared with the 17% annual return that it has delivered over the past decade.
Investors will need stronger than the 15% CAGR in earnings growth that we are assuming to earn the long-term return they have earned in the past.
• Get ready for rollercoaster ride, stock picking opportunities still exist
Our residual income pegs the 10-month forward fair value for the BSE Sensex at 13,651. This is roughly 22 per cent lower from the Friday close of 17461.
Our proprietary fundamental indicator has slipped sharply with a rising probability of slower earnings growth in 2008 even as valuation and sentiment indicators breached all-time highs in January 2008.
The near term is clouded by the challenges facing the Central Bank in absorbing incessant flows, the possibility of early polls, and the extent of a growth slowdown.
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Portfolio and Focus List: Defensive with a Large Cap bias
With a 12-month view, we remain selective with mid-caps given their relatively higher earnings risk and par valuations. In the short run, we expect the market to gain breadth causing stocks down the cap curve to fair better than their large cap brethren.
Our stock picking is centered on stocks that appear to be out of favor with investors, trade at inexpensive valuations and bear high relative volatility but a comparatively low beta.
We are underweight domestic cyclicals and private sector financials and overweight healthcare, energy, consumer staples and telecoms.
Morgan Stanley India Company Private Limited
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