New Delhi [India], June 5 : The recent report by Morgan Stanley, named "India Equity Strategy Playbook", reveals that Indian equities appear undervalued, presenting a compelling opportunity for long-term investors.
According to the report, "it will require patience, given the potential for bad news from outside India, but we believe rewards will come in time."
The Equity market of India has shown resilience since September 2024, digesting a lot of unprecedented amount of bad news, which includes overvaluations in small and mid-cap stocks (SMIDs), a broad market correction, US tariff volatility, and geopolitical events. Despite these hurdles, large-cap indexes remain within 5 per cent of all-time highs.
However, the report also points out various strong fundamental factors supporting India's positive outlook. The country exhibits strong macro stability, characterised by improving terms of trade, a declining primary deficit, and low inflation volatility.
Additionally, Morgan Stanley sees mid-to-high teens earnings growth is projected annually over the next three to five years, fuelled by an emerging private capital expenditure cycle, deleveraging of corporate balance sheets, and a structural increase in discretionary consumption.
Recent geopolitical developments have instilled a new doctrine on terror, potentially deterring future attacks and empowering decisive government action. Furthermore, an unexpected upside in military performance highlights advancements in strategy and combat capabilities, the report said.
The report adds that India will outperform other emerging markets in the coming months: "India's real policy rate relative to the US is turning up in the coming months and could support India's relative outperformance to EM in the coming months."
While the outlook is largely positive, the report also identifies several risks and catalysts. India-specific catalysts include potential dovish actions from the RBI, stimulus through GST rate cuts, a trade deal with the US, and positive incoming growth data.
Globally, US policy and growth rates will be crucial cues, alongside China's deflationary impulses and broader geopolitical risks. Given India's low beta, it is expected to outperform in a global bear market but underperform in a bull market.
Therefore, Morgan Stanley recommends a portfolio strategy favouring Domestic Cyclicals over Defensives and External-facing sectors.
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