The Indian stock market may be underestimating the likely turn in the growth cycle, said Morgan Stanley equity strategists Ridham Desai and Nayant Parekh.
In their latest strategy report, they contend that the earnings and market peak is in front of us, supported by structural changes in the economy and improving macro stability.
A Strong Case for Re-Rating
Morgan Stanley strategists highlight that India is poised to gain a larger share of global output over the coming decades, underpinned by strong foundational factors such as robust population growth, a functioning democracy, macro stability-influenced policy, better infrastructure, a rising entrepreneurial class, and improving social outcomes.
These shifts, they note, imply that India will emerge as one of the world’s most attractive consumer markets, see a manufacturing push, experience a major energy transition, and witness rising credit penetration relative to GDP.
Macro Shifts Lowering Volatility
According to Morgan Stanley, several structural trends will enable India to sustain high growth at lower volatility:
> Declining oil intensity in GDP.
> Rising share of exports, particularly services.
> Fiscal consolidation, with a likely primary surplus in three years.
> Lower inflation volatility due to flexible inflation targeting and supply-side reforms.
These factors suggest a future of structurally lower real interest rates and falling volatility in both growth and rates. “High growth with low volatility and falling interest rates and low beta = higher P/E,” they said.
Such a backdrop, combined with India’s improving macro stability and the household shift towards equities, justifies higher equity market multiples, the strategists argue.
“Price action hides how much stocks have de-rated relative to long bonds, emerging markets, and gold,” they write, noting that India’s rising share in global GDP remains underappreciated by investors.
Near-Term Outlook Turning Positive
While equities have faced a soft earnings patch since 2QFY25, Morgan Stanley believes this phase is ending. The market, however, is yet to fully price in the inflection. Supporting a growth revival are:
“Supporting a turn in growth is a dovish central bank, likely GST reforms, a good monsoon season, recovery in consumer confidence, thawing of relations with China and likely improving capex,” the analysts said in the report.
Potential catalysts include a trade deal with the US, further RBI easing, uniform improvement in high-frequency data, and slowing equity returns in other markets.
Interestingly, the report notes that foreign portfolio investors (FPIs) remain under-positioned in India, with allocations at their weakest since 2000. While they remain focused on geopolitical risks such as Russian oil imports, Morgan Stanley believes India’s low beta makes it an outperformer in global bear markets and an underperformer in bull markets – consistent with recent trends.
Portfolio Strategy
In its portfolio strategy, Morgan Stanley prefers Domestic Cyclicals over Defensives and External-facing sectors. It remains Overweight on Financials, Consumer Discretionary, and Industrials, and Underweight on Energy, Materials, Utilities, and Healthcare.
Morgan Stanley emphasizes that this is likely to be a stock-pickers’ market, with bottom-up opportunities taking precedence over macro-driven trades. “We run an average active position of just 80 bps and remain capitalization-agnostic,” the strategists note.