Morgan Stanley upgrades India to EW on lower valuation premiums and structural growth

Morgan Stanley's equity strategists believe that the risk from the weakness in the developed markets is limited

Morgan Stanley has upgraded India to equal-weight (EW), with the narrowing valuation premiums and a resilient economy, stated its equity strategists for the Asia-EM markets. They are particularly positive about the country’s financials and consumer-discretionary sectors.

Meanwhile, they remain overweight (OW) on China, Korea and Taiwan, believing that these economies will outperform as they have historically in the early phases of bull market. They also see supportive government policies, low-base effect and de-escalation of tensions with the US, working in favour of China.

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“India has underperformed since end-October, and valuation premium to EM has narrowed meaningfully, although it remains at a premium to LT (long-term) history… We are bullish on India's structural growth outlook, driven by a digital infrastructure empowered lending boom, demographics, domestic demand and improving FDI,” they wrote, in their latest strategy report.

The strategists believe that inflation in the country is peaking and, therefore, they expect a dovish move by the Reserve Bank of India (RBI) in April, seeing a rate hike of 25 bps. They also see the consumer-price index (CPI) to soften on lower oil prices. “The external macro environment is less challenging for India, given potentially easing pressure from energy costs and a weaker US dollar,” they added.

Morgan Stanley’s Chief India Economist, Upasana Chachra, also sees a rebound in rural economy, with reopening and improving labour market and terms of trade.

The strategists believe that the risk from the weakness in the developed markets (DM), though key, is limited. They were going by the exports to GDP ratios (12M trailing sum)--of 2% to the US and 3% to the EU—and the estimated revenue exposure to the US (10%) and to the Developed Europe (7%).

The strategists wrote that investors might be skeptical of the India growth story, “since the progress has been somewhat disappointing in the last decade”. But, they added, things have changed.

“First is a shift to more supportive government policy, in turn lifting wages and spurring increases in corporate profits' share of GDP, since the latter has proven to be an effective way to boost real growth. Corporate tax rate cuts, more emphasis on improving infrastructure, deregulation of sectors and stepping up of privatization are all key reform actions to address key concerns,” they wrote.

“These factors, coupled with cleaner corporate and financial sector balance sheets, should help unleash a new capex upcycle which is likely to foster a new wave of loan growth. The launch of AADHAAR, a foundational ID for all Indians, should smooth financial transactions and improve digital penetration,” they added.