India's Ten-Year Transformation To Lift Profits, Rerate Stocks, Says Morgan Stanley
India gained position in the world order in the last 10 years, with significant positive consequences for macro, market outlook.
India's corporate profits will boom and stocks will rerate as India becomes a key driver for Asian growth, benefiting from transformation over the past decade, according to Morgan Stanley.
India, over the past ten years, has gained positions in the world order with significant positive consequences for the macro and market outlook, it said in a report co-authored by Ridham Desai, India equity strategist at Morgan Stanley.
India's beta, a measure of volatility or systematic risk, to emerging markets has fallen to 0.6 due to improved macro stability and dependence on global market flows to fund the current account deficit, the report said. That has made Indian stocks "defensive" bets.
Morgan Stanley sees a breakdown in correlation with the U.S. recessions and global oil prices as a positive for India.
Implications Of The Change
The share of profits in GDP, Morgan Stanley said, is set rise further or even double from its current value which will lead to strong absolute and relative earnings. The share of profits in GDP has doubled from all-time lows in 2020.
This, according to the research firm, explains India's rich valuations.
Morgan Stanley also expects a major rise in investments triggered by supply-side reforms by the government. It also predicted a moderation in current account deficit and an increase in credit to GDP to support the coming profit growth.
The 'significant' changes that the country underwent over the past ten years also reflects a persistent domestic demand for stocks and higher growth for longer, Morgan Stanley said.
"India is trading at a premium to long-term history, albeit well off highs and in line with recent history," Morgan Stanley said.
Other Implications
The manufacturing and capex as a percentage of the GDP is likely to increase steadily.
India's export market share is estimated to rise to 4.5% by 2031, nearly doubling from 2021 levels, with broad based gains across goods and services.
There will be a major shift in consumption basket with rising per capita income.
Inflation to remain benign and less volatile which would imply shallower rate cycles.
India will witness a benign trend in current account deficit.
There will be a lower correlation with oil prices.
The report cites a global recession, a fragmented general election outcome in 2024, a sharp rise in commodity prices due to supply outages and shortages in skilled labor supply are key risks.
Key Sectors
Morgan Stanley expects a discretionary spending boom. The mordern trade and e-commerce channels will gain salience while the allocation of spends are likely to shift in favour of discretionary categories, the note said.
The energy sector is expected to thrive in 2023 as compared to 2021, with consumption increasing to 1,300 watts per capita per day from 800 watts in 2021, it said.
