India may have underperformed some of its emerging market peers this year, but its market valuation has turned attractive again, and policy stimulus is expected to drive a significant rebound in earnings growth, according to Jonathan Garner, Chief Asia & Emerging Market Strategist, Morgan Stanley. In an interview with CNBC TV18, Garner said he remains ‘overweight’ on India, outlining his outlook on domestic markets, foreign flows, and global risks.
Garner noted that India’s relative performance softened this year as nominal gross domestic product (GDP) growth slowed more than anticipated. In contrast, North Asian markets such as Korea and Taiwan surged, buoyed by the global rush into semiconductors, technology hardware, and artificial intelligence.
This divergence pushed India’s valuation from roughly one standard deviation above its long-term average to about one standard deviation below. “The reason that relative derating happened is that relative earnings growth momentum slowed,” he said.
Even so, Garner is upbeat about the road ahead. Morgan Stanley’s economists are confident that recent policy stimulus will trigger a “meaningful upswing in nominal GDP growth.” As a result, corporate earnings growth, currently at 7-8 percent, is expected to accelerate to the mid-teens next year, he said.
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Responding to concerns over FII flows, Garner pushed back against the suggestion that foreign investors are withdrawing from India. “There is foreign investment participation in India on an ongoing and daily basis. And India’s had a very vibrant IPO and secondary market… it’s a much wider range of investors that participate in the market than did in the past,” he said, calling the “foreigners leaving” narrative misleading.
On sector positioning, Garner said Morgan Stanley is overweight on financials, consumer discretionary, and industrials -- in line with its broader Asia strategy, including Japan. The firm is underweight on energy, materials, utilities, and healthcare. He declined to comment on individual stocks but said a name like Maruti sits in the “right space” as a consumer discretionary play that typically performs well during cyclical upswings.
On the broader emerging market environment, Garner advised caution. Investors should maintain “tight market risk positions” and rely on nimble stock selection, as global macro volatility is unlikely to ease soon. “We’re living in very uncertain times. So it’s not a sort of bang-the-table opportunity on any individual larger market here for us,” he warned.
He also downplayed fears that Japan could become a source of volatility, particularly through an unwinding of the yen carry trade. The recent rise in Japanese bond yields, he said, represents healthy “normalisation” after the Bank of Japan reduced its interventions. With Japanese 10-year yields around 1.8 percent -- still well below US levels — he believes the yen is undervalued and expects it to strengthen towards the mid-140s against the dollar in the coming months.
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