Indian Stocks Appealing as Valuations Hit Lowest Since COVID: Morgan Stanley

Indian equities are poised for a rebound in 2025, as growth is projected to recover and valuations reach their most attractive levels since the COVID-19 pandemic, according to a research report by Morgan Stanley.

The brokerage anticipates India's GDP growth to reach 6.3% in the fiscal year 2025 and 6.5% in 2026, supported by improvements in high-frequency economic indicators, as well as fiscal and monetary policy measures. Additionally, a revival in service exports is expected to contribute to economic expansion.

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Strong Economic Fundamentals

India's long-term economic prospects remain robust, driven by factors such as population growth, political stability, infrastructure development, and a growing entrepreneurial ecosystem. These elements could enhance India's position as a major consumer market while increasing the contribution of manufacturing to GDP. The report highlights that the government’s focus on capital expenditure, manufacturing incentives, and ease of doing business reforms will likely accelerate economic growth.

Furthermore, the expansion of digital infrastructure and rapid adoption of technology across industries are expected to drive productivity gains. The growth of India's middle class and rising disposable incomes are also likely to boost domestic consumption, reinforcing the country’s economic resilience.

Market Performance and Stock Valuations

Despite strengthening fundamentals, Indian equities have underperformed compared to global counterparts. However, Morgan Stanley predicts that the market will regain momentum, fueled by a recovery in corporate earnings. The report highlights that India's relative earnings growth is turning positive, even with conservative estimates, while stock valuations are currently at some of their most attractive levels in recent years.

Additionally, sectors such as real estate and infrastructure are expected to benefit from government-led initiatives, providing further support to the overall market. Companies with strong balance sheets, sustainable business models, and competitive advantages in their respective industries are likely to see long-term gains.

Investment Strategies and Sectoral Outlook

The brokerage emphasizes a preference for selective stock-picking over broad-based investment strategies, recommending overweight positions in financials, consumer discretionary, industrials, and technology sectors while remaining underweight in others. It also suggests that cyclical stocks and mid- to small-cap companies are likely to outperform larger, defensive stocks.

With India undergoing a structural shift towards manufacturing and digital transformation, Morgan Stanley expects technology-driven businesses to witness strong demand. The rise of fintech, e-commerce, and AI-driven enterprises could offer significant investment opportunities. Additionally, the financial sector is likely to benefit from continued credit growth, low non-performing assets (NPAs), and an expanding customer base.

Key Growth Drivers and Potential Risks

Key factors driving this outlook include the Reserve Bank of India's recent policy shift, a pro-growth government budget, and sustained domestic investor participation. The central bank's accommodative stance on interest rates, along with liquidity support measures, is expected to create a favorable environment for corporate growth.

However, potential risks to this optimistic outlook stem from external factors such as global trade policies, the strength of the U.S. dollar, and overall financial conditions. Uncertainty in international markets, geopolitical tensions, and supply chain disruptions could pose challenges to economic recovery. Additionally, inflationary pressures and fluctuations in commodity prices may impact corporate profitability.

India's Position in the Global Market

Morgan Stanley also points out that India's relatively low correlation with global markets, combined with strong domestic investment, positions it as a stable option in an otherwise uncertain macroeconomic environment. The country's ability to attract foreign direct investment (FDI) and strengthen its manufacturing base under initiatives like "Make in India" could further solidify its position as a key player in the global economy.

As India continues to evolve into an economic powerhouse, its equity markets are likely to reflect this transformation, offering long-term growth potential for investors.