Indian Markets Poised to Outperform Emerging Markets in the Coming Months: Morgan Stanley

Despite recent selling pressure in Indian markets over the past few months, international brokerage firm Morgan Stanley maintains a positive outlook on Indian equities. The brokerage believes that investing in Indian stocks could be rewarding, provided global macroeconomic conditions remain stable and do not bring unexpected disruptions.

Morgan Stanley anticipates that once the ongoing market correction subsides, Indian equities could regain their position as an outperformer among emerging markets. This shift is expected to take place within the next few months, driven by the country’s robust macroeconomic fundamentals and favorable market dynamics.

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Strong Macro Stability Supports Growth Prospects

India’s economic resilience is a key factor behind Morgan Stanley’s optimistic stance. The brokerage highlights several macroeconomic factors contributing to this stability, including:

• Improving terms of trade
• Declining primary deficit
• Reduced inflation volatility
   

These factors indicate that India's economic foundation remains strong, even amid global uncertainties. The brokerage asserts that these macroeconomic improvements will help sustain investor confidence and drive long-term market gains.

Earnings Growth Driven by Private Capex and Corporate Releveraging

Over the next three to five years, corporate earnings in India are projected to grow at a mid- to high-teens rate. This growth will be driven primarily by two factors:

A new cycle of private capital expenditure (capex), which will boost corporate investments and drive expansion.
Releveraging of corporate balance sheets, as companies increase borrowing for strategic investments and expansion plans.

These trends indicate that India Inc. is on a trajectory for sustained earnings growth, which will contribute to the stock market’s long-term strength.

Revival in Consumption and Discretionary Spending

Another significant factor supporting India's growth is the anticipated recovery in consumer spending. Consumption, which plays a crucial role in economic expansion, is expected to bounce back strongly in the coming years.

In 2024, Morgan Stanley highlighted a structural rise in discretionary expenditure, driven by India surpassing the critical $2,000 per-capita GDP threshold. This milestone is significant because it signals a shift toward greater consumer spending, especially in discretionary categories such as electronics, automobiles, luxury goods, and travel.

India’s broad income pyramid further strengthens this momentum, as rising incomes across different segments of the population fuel demand for a variety of goods and services.

Market Valuations and India’s Beta Decline

The recent correction in Indian markets has resulted in a decline in India's beta relative to other emerging markets (EMs), bringing it down to approximately 0.4. This drop suggests that while Indian markets remain relatively expensive compared to their EM counterparts, they also exhibit greater stability.

The brokerage attributes this decline to limited aggressive selling in the market. Unlike in previous corrections, the current downturn has been characterized more by a lack of buyers rather than panic-driven sell-offs, further reinforcing the expectation of a potential rebound.

Investor Sentiment and Best Risk-Reward Opportunities

In its latest report, Morgan Stanley acknowledged that growth concerns have unsettled investors in recent months. However, the firm maintains its conviction that a recovery is on the horizon.

The brokerage noted that the recent market decline has occurred amid falling trading volumes, which suggests that there is no widespread panic selling but rather a temporary lack of investor participation. This trend could indicate that once market sentiment improves, buying interest may return, leading to a market rebound.

Among various sectors, private financials appear to offer the most attractive risk-reward balance in the current environment. The sector is well-positioned to benefit from:

• Strengthening credit growth
• Improving asset quality
• Higher consumer spending and business expansion
   

Morgan Stanley’s Sentiment Indicator Signals a Buying Opportunity

One of the key insights from Morgan Stanley’s latest analysis is that its proprietary sentiment indicator has entered buy territory for the first time since mid-2022. This suggests that market conditions could soon turn favorable for investors looking to enter at attractive valuations.

While the indicator could see a further dip—similar to what occurred in March 2020—the brokerage does not expect fundamentals to deteriorate significantly from current levels. This reinforces the view that Indian equities remain a strong long-term investment opportunity despite short-term volatility.

Conclusion: India’s Market Poised for Growth

Morgan Stanley’s outlook on Indian equities remains bullish despite recent market weakness. The brokerage believes that:

India’s strong macroeconomic fundamentals will drive sustained growth.

• Corporate earnings growth will be fueled by private capex and re-leveraging.
• Consumer spending will continue to rise, strengthening demand across multiple sectors.
• Valuations remain rich, but the recent correction presents a long-term buying opportunity.
   

With market sentiment showing early signs of a potential turnaround, Morgan Stanley suggests that investors looking for attractive entry points may find Indian equities increasingly compelling in the months ahead.