Morgan Stanley: Rally Could Gain Momentum

Morgan Stanley-India Research* **
*India Strategy: Quick Comment -The Rally Could Gain Momentum (R.Desai /
S.Rathi)*
**
Last week we thought the market could rally to around 4350 on the Nifty and
14800 on the Sensex on the back of severe price erosion, reasonable
valuations, weaker crude oil prices and fragile sentiment.

With crude continuing to weaken, global financial markets stabilizing and
UPA winning the trust vote, several conditions needed to drive the market
higher seem to have been satisfied. This rally will likely sustain if:

1. Crude oil prices remain soft.

2. Global financial markets remain stable.

3. Inflation data doesn't surprise negatively. Expectation of 12% inflation
already appears priced in.

4. We get no major negative earnings surprise through the end of July.

5. We get benign policy action by RBI on the back of slippage in crude oil
prices at the end of this month.

*Indeed, this is likely to be a strong rally and could be something similar
to the one we got between mid-March and mid-May (21% rise in the BSE Sensex)
if these conditions continue. *
**
*Property stocks could be the best way to play the ongoing rally. *
**
*We expect bulls to get complacent and start to believe that this is the
beginning of a new bull market. However, we think this is likely to prove to
be just another powerful bear market rally. *
**
***Afterall the market still faces headwinds from high crude oil prices,
political uncertainty, fragile global financial markets, weak domestic
sentiment, likelihood of higher long bond yields, slowing growth and
prospects of earnings downgrades.*