However, the brokerage firm has raised its year-end target for Sensex to 55,000 from 50,000 earlier in its most probable forecast for the benchmark index.
For its bullish case to play out, Morgan Stanley said that corporate earnings will have to grow 37 per cent in the next financial year and the US dollar will have to enter a sustained bear market that will accelerate foreign inflows.
Equity market sentiment has been buoyed by the lack of any new income tax, the push for growth through higher infrastructure spending, and a refreshed approach to monetization of government assets including proposed privatization of two public sector banks and one insurance firm, the brokerage firm said in a note.
Morgan Stanley said that the Budget has laid foundation for Indian equity markets to catch-up with their emerging market peers in terms of stock market performance and prefers stocks in cyclical sectors, interest rate sensitive sectors and midcaps.
Finance Minister Nirmala Sitharaman took investors by surprise as she side-stepped fiscal prudence and pump-primed the economy largely through higher spending on healthcare infrastructure and capital expenditure. Further, the lack of tweaks on income tax boosted sentiment as it was the biggest concern heading into the Budget speech on Monday.
“If these measures are executed well, this budget has the potency to lift the share of corporate profits in GDP, augmenting the strategic shift in government policy when corporate tax rates were cut in September 2019,” the brokerage firm said.
On the larger-than-expected fiscal deficit target for 2021-22, Morgan Stanley said the overall approach of the fiscal policy is in line with the message from the Economic Survey, which made a case for active fiscal policy and the focus on growth for creating debt sustainability.
“Our view is that the budget proposals may promote a new private investment cycle, with a recovery in domestic equity flows and overall growth,” the brokerage firm added.