‘Indian Stocks Showing Early Signs of Bull Market’ Morgan Stanley points out three conditions as key to the next bull run

Indian stocks are exhibiting early signs of a bull market, said leading US investment bank Morgan Stanley in its note, but feels they are not quite there yet. 

The foreign brokerage believes three conditions will be critical: a bullish steepening of the Indian yield curve, expanding profit margins and attractive valuations. Of these, spread between the 10-year bond yield and the 91-day treasury-bill is already reversing its steep inversion, says Morgan Stanley, while it sees stock valuations as attractive. 
It believes profit growth is also in a period of mild recovery though a full-blown margin expansion cycle is on hand. "We believe that the market is preparing itself for the next big bull market, though we are not quite there yet," said Morgan Stanley in its note. 
"Valuations are definitely attractive but, it will take some for the market to move. Softening of inflation and consequent interest rate reduction and some major action on the policy front will be crucial for the future direction in the market," said D Kannan, managing director, Kotak Securities. Morgan Stanley's outlook on the market also reflects bullish sentiment of foreign institutional investors, which have been buying on the Indian bourses for the past few months. The last couple of months have seen a significant rise in their inflows, with net investments amounting to . 7,305 crore in July, compared with . 4,056 crore in the previous month. 
On Monday, the Sensex rallied 215 points on major FII buying in shares led by Reliance Industries. FII were net purchases for . 556 crore, according to provision figures compiled by two stock exchanges BSE and NSE. The Sensex closed at 17,412.96, up 215.03 points or 1.25%. 
Morgan's bullish outlook comes in the backdrop of inflation worries, high interest rates and lack of policy initiatives that have been weighing heavily on the economy for a while now. 
Its views, according to some brokers, would help the sentiment improve in the short term, provided the mood remains positive globally. 
FII inflows are likely to pour in with no major opportunities elsewhere, and fears of a slowdown in China and growth concerns in the US and European economies, say brokers.