Despite seeing an eight percent correction, global brokerage Morgan Stanley believes that India's capital markets are in a boom phase at present and that it has more legs than the consensus believes.
The current bull run (over the past year and half) has been underpinned by a policy focus on macro stability. "Macro stability has driven down inflation volatility, making India’s growth more predictable. Lower inflation volatility means that markets – including equities, the INR and government bonds – are less volatile now than they ever have been," explained the brokerage. More predictable growth means that India’s beta relative to emerging markets has fallen and equity valuations have risen.
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The reason behind higher valuations in India being digested by investors is India's strong earnings outlook. This is a result of an emerging private capex cycle, re-leveraging of corporate balance sheets, and the unfolding of a structural rise in discretionary consumption.
Further, the country is slated to drive one-fifth of global growth over the coming decade, as per the brokerage. India's deep tech sector may also produce major positive surprises, such as
new listings or IPOs and new growth industries.
"We believe shifting external dynamics – including the declining oil intensity of GDP and higher share of global trade – are also very positive for corporate earnings. These changes could sustain a 18-20 percent earnings CAGR for the next 4-5 years and drive the market higher," said Morgan Stanley.
Further, India has proven to be a fruitful market for private equity, venture capital funds and sovereign funds over the past several years who have managed profitable exits in recent years; Morgan Stanley expects this cohort will also step up activity in the coming decade.
"We believe the Indian market has compounded well over time in both INR and USD terms, ranking among the best performing stock markets worldwide over time. We expect returns to moderate given the starting point but remain robust. In our base case, Indian equities likely compound in low double digits over the coming decade," said the brokerage.
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