Morgan Stanley has reaffirmed its bullish stance on Indian equities, arguing that the recent market cool-off is a temporary phase rather than a structural reset, according to a report by the brokerage. The firm expects stronger economic growth to help India regain lost valuation ground and reinforce the investment case for its stocks.
Market Context and Valuation
The report highlights that the relative de-rating of Indian equities has been driven largely by differences in India's economic growth compared with the rest of the world. According to Morgan Stanley, this trend is expected to reverse as growth gathers pace. "India's relative de-rating is cyclical and with growth acceleration in the pipeline, it has potential to reverse," the brokerage stated.
Recent weakness in Indian equities, combined with lower foreign investor ownership, could leave the market well placed for a recovery. The firm believes these factors could create a favourable backdrop for Indian stocks in the coming period. It pushed back against the view that India's valuation decline is structural, arguing that concerns around the country's long-term growth prospects are overstated.
Demographics and AI Concerns Downplayed
Morgan Stanley addressed two key headwinds often cited by skeptics: falling fertility rates and the impact of artificial intelligence (AI) on services exports. On demographics, the report said the decline in fertility has not been sudden and is expected to continue supporting economic growth over the next two decades, although it may gradually reduce India's long-term demographic advantage.
Regarding AI, the brokerage acknowledged that the technology may slow the momentum of services exports in the near term. However, over the medium term, AI offers an opportunity to improve labour productivity from India's relatively low productivity base. This counters the argument that AI could permanently hurt India's services trade.
Structural Growth Drivers
The report outlined several structural strengths underpinning India's long-term growth story. These include a multi-polar global economy that could help raise the country's share in global goods trade, an expanding consumer base, and a significant increase in investments. While the economy appears to have bottomed out and is moving higher, Morgan Stanley noted that growth still trails some economies that are benefiting from the global AI capital expenditure cycle.
| Key Factor | Morgan Stanley's View |
|---|---|
| Valuation decline | Cyclical, likely to reverse with growth acceleration |
| Fertility rate | Gradual decline, supports growth for next two decades |
| AI impact on services | Near-term drag, medium-term opportunity for productivity |
| Foreign ownership | Lower ownership leaves room for recovery |
| Global growth gap | Sentiment depends on gap narrowing |
Earnings and Market Direction
According to Morgan Stanley, the next direction for Indian markets will depend on how investors view the growth gap between India and the global economy. Sentiment could improve if enthusiasm around global AI-related capital expenditure moderates or if India's economic growth accelerates further.
The report also flagged the upcoming quarterly earnings season as a key event. It said companies could deliver positive earnings surprises, supported by strong high-frequency economic indicators. This could provide a catalyst for the market's recovery.
Morgan Stanley's bullish stance suggests that the recent pullback in Indian equities may be an opportunity for long-term investors. The brokerage expects cyclical factors to give way to structural strengths, making India an attractive destination for equity investments.
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