Indian markets likely resume outperformance to EMs in coming months: Morgan Stanley

Corporate earnings are likely to see mid- to high-teens earnings growth in the next 3-5 years.

Despite the selling pressure seen in the markets over the past few months, international brokerage Morgan Stanley believes that buying into Indian equities will prove rewarding if global cues don't surprise negatively.

Once the correction comes to an end, Indian markets could likely resume their outperformance to the emerging markets pack, which will likely be in the coming months. India has strong macro stability with improving terms of trade, declining primary deficit, and falling inflation volatility, noted the brokerage.

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Over the next three to five years, India Inc. is likely to see mid- to high-teens earnings growth, which will be led by an emerging private capex cycle and releveraging of corporate balance sheets.

Further, consumption is slated to make a comeback, with a structural rise in discretionary expenditure likely. In 2024, the brokerage had noted that the breadth of India's income pyramid lends itself to momentum in consumer spending, which is likely to benefit as India has crossed the crucial $2,000 per-capita GDP level. This income level signifies a rising share of discretionary spending.

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Currently, the ongoing correction has reduced India's beta compared to other EMs to ~0.4, which explains the market's rich headline multiple.

Last month, Morgan Stanley had reiterated its views, saying a slowdown in growth has unnerved investors, but it believes a recovery is on the horizon. The recent price decline has occurred on falling trading volumes, suggesting a lack of buyers rather than aggressive selling. Private financials appear to offer the best risk-reward balance in the current environment.

"Our proprietary sentiment indicator has entered buy territory for the first time since mid-2022. While it could dip further, as seen in March 2020, we do not expect fundamentals to deteriorate significantly from here",  the brokerage said.

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