Morgan Stanley expects India to recover lost ground through 2025, says market looks attractive

Morgan Stanley expects outperformance from banks to continue.

Global brokerage firm Morgan Stanley views Indian stocks with an attractive lens, expecting it to to recover lost ground against its peer group through the rest of 2025. The firm sees a stock picker's market unfolding in India, with a likely shift in fundamentals not priced in yet.

"India's relative earnings growth is turning up based even on the more conservative consensus forecasts. In the meanwhile valuations are the most attractive since the Covid pandemic. The market has ignored the RBI's policy pivot, and a strong budget from the government, among other positive developments since early February," the brokerage wrote in its note.

"India's policy environment today is far more certain than the rest of the world put together, whether it is US, Europe or China," Morgan Stanley India's Ridham Desai reiterated in a conversation with CNBC-TV18.

Meanwhile, Morgan Stanley believes India's low-beta nature makes it a resilient market amid the current macro uncertainty in equities, making it a strong buy candidate according to the firm.

In terms of sectors, the firm favours cyclicals over defensives, with small and mid-caps preferred over large caps. Morgan Stanley also maintains an overweight stance on financials, consumer discretionary, industrials, and technology while underweighting other sectors. "Unlike the macro-driven trends seen since the Covid pandemic, this market is expected to be led by stock pickers," the firm reiterated.

India's long-term story intact

Morgan Stanley expects India to gain a larger share in global output over the coming decades. This market share expansion is likely to be driven by key structural factors such as a growing population, a stable democracy, macroeconomic stability, improved infrastructure, a rising entrepreneurial class, and better social outcomes.

"As a result, India is poised to become one of the world's most sought-after consumer markets, undergo a significant energy transition, see an increase in credit-to-GDP ratio, and witness a potential rise in manufacturing’s contribution to GDP," the firm said.

"We expect growth to recover after a slowdown in the second half of 2024 on fiscal and monetary policy support, with recovery in service exports. We expect GDP at 6.3 percent in FY25 and 6.5 percent in FY26. Macro-stability should remain in the comfort range, providing flexibility to policymakers," Morgan Stanley added.

Growth to make its way

Morgan Stanley anticipates a recovery in growth for India Inc following its recent slowdown, with the current quarter potentially poised for upside surprises in earnings. Valuations also remain attractive across market segments, creating opportunities for investors, the firm believes. Meanwhile, it expects the outperformance of banks to persist, while consumer discretionary and select industrials could also see strong gains.

Also Read | India will outperform the global bear market, retail won't give up: Morgan Stanley's Ridham Desai

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