Morgan Stanley upgrades India to overweight, downgrades China

Morgan Stanley also expects Sensex to reach 68,500 points by December

Brokerage firm Morgan Stanley has recently upgraded India's status to 'overweight', as it is of the view that the country is poised for substantial and sustained economic growth, at a time when rest of the world is slowing down. Simultaneously, it has downgraded its rating on China to 'equal-weight'.

This upgrade comes just four months after Morgan Stanley previously elevated India from 'underweight' to 'equal weight' on March 31, citing factors such as reduced valuation premium and the resilient economy. Morgan said India has jumped from the sixth position to take the coveted first spot in its rankings.

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“Relative valuations have become less extreme compared to last October, contributing to this meteoric rise,” the Morgan Stanley report said. The ongoing trend of a Multipolar World is driving foreign direct investment (FDI) and portfolio flows, and India's reform-oriented and macro-stable agenda strengthens its prospects for robust capital expenditure (capex) and profitability outlook, the brokerage firm said in its report.

Furthermore, the brokerage has also made specific sector upgrades for India, including industrials, financials, and consumer discretionary stocks, which are now rated as 'overweight'. It expects these sectors to be major beneficiaries of India's ongoing structural growth story.

Within its Asia-Pacific Ex-Japan focus list, Morgan Stanley has added Indian stocks like Larsen & Toubro and Maruti Suzuki, while removing Titan from the list. Both Larsen & Toubro and Maruti Suzuki have also been included in the GEM (Global Emerging Markets) focus list.

India now holds the core overweight position for Morgan Stanley within the Asia Pacific Ex-Japan and Emerging Markets category. Valuation premiums for India compared to Emerging Markets and China have moderated since their peak in the previous year, but they are beginning to rise again, enhancing India's attractiveness as an investment prospect.

Also Read: Morgan Stanley adds Maruti Suzuki, L&T to its focus list for Asia-Pacific stocks

Despite the positive outlook, Morgan Stanley's note highlights several key downside risks for the Indian market. Unexpected inflation surges and changes in monetary policies could have adverse effects, particularly if productivity improvements do not keep pace, the report said. Moreover, the potential disruptive impact of artificial intelligence on India's services exports and the labor force is also something to track closely.

Morgan Stanley also upgraded Greece to 'overweight', downgraded Australia to 'underweight', and revises MSCI China and Taiwan from 'overweight' to 'equal weight'.

Moreover, Morgan Stanley also expects Sensex to reach 68,500 points by December, a potential increase of 10 percent from the current level and expects the index to trade at a trailing price-to-earnings multiple of 20.5 times compared to a 25-year average of 20x. The brokerage firm said that the premium over the historical average reflects greater confidence in medium-term growth.