After starting the year on a downward trend, the Indian markets have now started moving to a pre-election rally. Given the trend, Morgan Stanley believes the market performance will only be broader in the near-term. "The market could start pricing in a strong election outcome in the coming weeks causing Nifty to break its four-month range to the upside. the broader markets are likely to outperform the benchmarks," Morgan Stanley said in a report dated March 6, 2019.

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Morgan Stanley prefers banks, discretionary consumption, and industrials in both large and mid-caps.

In a year-to-date basis, the BSE Midcap and Smallcap indices plunged 3.5 percent and 0.7 percent, respectively, so far. In comparison, the benchmark Sensex has gained 1.8 percent.

However, in the last week, the BSE Midcap index surged over 4.5 percent and the Smallcap index rallied nearly 8 percent. In comparison, the Sensex rose 2 percent for the same period.

The broader market price action suggests it was oversold both in breadth, but now reverting from multi-year lows, it added. They prefer midcaps where the forward growth is not reflecting in share price performance.

Morgan Stanley expects an overall recovery in the small and mid-cap space. Indraprastha Gas, Indian Hotels, Cyient IPCA Labs, Just Dial, Jubilant Foodworks, Oberoi Realty, Prestige Estates, Edelweiss Financial, Apollo Hospitals, and Amara Raja Batteries are its top picks in the midcap space.

"The performance gap between the benchmark and broad markets has started to narrow but has a fair bit of distance to cover, the brokerage reiterates.

The way to construct a portfolio is to buy stocks of companies with highers delta in return on capital, the brokerage suggests. Among sectors, they recommend increasing the discretionary, financial and industrial sectors in the portfolio.

Strong consumer loan growth and rising real incomes are positive for the consumer discretionary sector, while for the industrials, the public capex remain strong.

The brokerage is overweight on Maruti Suzuki, M&M, Ashok Leyland, and Eicher Motors from the auto sector and HDFC Bank, ICICI Bank, SBI, ICICI Prudential Life from the financial sectors. Reliance, Titan, Dabur and Ultratech Cements also get a thumbs up from the brokerage.

Here's Morgan Stanley's list of growth at reasonable price (GARP) stocks investors must focus on:

First Published:Mar 7, 2019 11:57 AM IST