The market is implying an equity risk premium of 6.4 per cent. Our residual income model indicates that the implied equity risk premium is 6.4 per cent. At the current long bond yield, this implies a long-term return of 14.7 per cent. This level of implied returns puts the market in the bottom quintile in terms of expectations.

The market is quite pessimistic about growth: Put another way, the market is assigning 50 per cent of the MSCI Index value to future growth. This is lower than the trailing five-year average and puts equities in a positive light for long-term investors.

The earnings growth implied by the market for F2013 is around 4 per cent, which is compares with our top-down forecast of double-digit growth. The long-term earnings growth priced in is also a lot lower than the trailing long-term growth.

The market is bullish on consumer stocks while appearing less positive on cyclicals and financials: Consumer staples are pricing in excess of 30 per cent growth for the five years beyond F2014. In contrast, the number is 8 per cent for Financials and 10 per cent for Consumer Discretionary.

Industrials appear to be less compelling with 13 per cent growth, but this could be a bit overstated, as some large companies have “valuable” subsidiaries with low earnings visibility. It is also interesting to note that the consensus numbers for earnings in the coming two years are higher than the Morgan Stanley analyst view for these cyclical sectors.

Our work at the stock level shows that the market is pricing in negative or single-digit EPS growth for the next five years for about 50 per cent of the stocks we analysed. For investors with a focus on growth at a reasonable price, we have constructed a basket using the best picks from various sectors based on our analysts’ opinions on what is the likely long-term growth versus what’s priced in.