Underweight on India but Overweight on Indian Financials: Morgan Stanley

Morgan Stanley headquarters (Image: Bloomberg)

This has been a long drawn bear market for emerging markets and Asia Pacific equities. According to Morgan Stanley’s latest report co-authored by Jonathan Garner, emerging markets (EMs) first got into trouble in February 2021. That means, we are almost 600 days into this bear market. On an average, a bear market lasts only 289 days.

Morgan Stanley also believes that the peak-to-trough move of -40 percent is greater than the average. In 2001, during the dotcom bust, the peak-to-trough move took 589 days, while this time it has taken 590 days.

Light at the end of tunnel

After this long stretch of loss, the global brokerage now believes that emerging markets and Asia are close to the end. The bear-market cycle will be over soon and it is time to "plant saplings for next cycle" as "a lot of the wood has been chopped."

Investors should "rotate towards proven early-cycle beneficiaries," Garner and his colleagues said, and upgraded Korea and Taiwan equities to Buy. They have also upgraded their stance on Asia’s semiconductor and tech hardware sectors to Overweight.

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After the current set of upgrades, Morgan Stanley’s base case for the Korean exchange KOSPI is 2,600 (an upside of 21 percent from current level), for the Taiwanese exchange TAIEX it is 16,500 (an upside of 24 percent). For Morgan Stanley’s own MSCI Emerging Market index, it is 1,000.

What’s the view on India?

The firm is Underweight on Indian equities. According to them, Indonesia, Singapore, and India’s economies are fundamentally sound on macros but are still expensive. “Since Indian markets have relatively outperformed in 2022, it might ultimately lag in the Emerging Market rebound,” the report stated. The Nifty is down only 1.7 percent this year so far, while the MSCI EM index is down 35 percent.

The Indian market has been downgraded to accommodate their Overweight upgrades of Korea and Taiwan.

When it comes to sectors, Morgan Stanley is Overweight on India’s financials pocket, while industrials has moved to Underweight on valuation grounds. They have added ICICI Bank to their GEM Focus list, with a target price of Rs 1,225 — a 40 percent upside.

Meanwhile, they continue to remain bullish on India's prospects in the long-term. “We see the market reforming and deepening, providing opportunities to accommodate increasing investor interest and longer term shifts towards a multipolar world,” the report added.

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