Why Morgan Stanley Remains Optimistic On India Stocks Despite Valuation Concern
However, Morgan Stanley expects the macro trade—taking positions based on analysis of economic data such as GDP growth, inflation and unemployment—to peak in the upcoming weeks.
Indian stocks will continue to benefit from the earning cycle, macro stability and domestic bid, but valuations remain a key challenge in the near term, according to Morgan Stanley.
The brokerage prefers cyclicals over defensives, with a preference for large caps over small and medium caps. It remains 'overweight' on the financials, technology, consumer discretionary and industrial sectors, while remaining 'underweight' on other sectors.
However, Morgan Stanley expects the macro trade—taking positions based on analysis of economic data such as GDP growth, inflation and unemployment—to peak in the upcoming weeks.
What Is Driving The Bid On Indian Stocks
The moderate real interest rates and stable-to-rising real GDP growth have set the stage to increase bids on Indian stocks, according to Morgan Stanley. This macro stability underpins the current bull market, it said.
"Along with the rising pool of domestic savings into equities, it has lowered the volatility across bonds, the currency and stocks, with India’s beta relative to emerging markets now at just over 0.3," it said.
The emerging private capex cycle-driven profit growth, corporate balance sheet re-leveraging, and increasing discretionary spending growth make Indian stock market valuations tolerable, the brokerage said in April 3.
"Trend earnings are still below nominal GDP, so the cycle has room to the upside—our topdown estimates are ahead of consensus," the research firm said.
Given the low allocation towards stock among Indian households, demographics and retirement plan flows underpin rising domestic flows, which Morgan Stanley sees as a multi-year secular story.
While the bond flows due to the country's inclusion in the bond index should help keep the external situation in good stead, the brokerage said.
Challenges And Risks
Valuations, in particular market cap to GDP, appear to be stretched, but then share prices have barely kept pace with earnings over the past three to five years, whereas we remain in an earnings upcycle. That said, several SMID stocks look overcooked.
Election results in May produce discontinuity and an unstable government.
US equities falter, either due to delayed rate cuts and/or growth disappointments.
Oil prices rise sharply; while India remains less affected than in the past, a sharp rise will present headwinds.
Monetary policy: the Morgan Stanley base case is status quo, but inflation and Fed moves are key.
A rise in net issuances could moderate the strong domestic bid amidst greater volatility in FPI flows.
