Morgan Stanley cites opening up of equities to retirement funds as a key trigger for stock surge

India now holds the core overweight position for Morgan Stanley within the Asia Pacific Ex-Japan and Emerging Markets category

India allowed retirement funds to invest in equities for the first time in 2015. This was similar to what happened in 1980 in the United States when 401(k) retirement plans were allowed to buy stocks. According to Morgan Stanley, this has created a reliable domestic source of risk capital.

"Given India's young demographic, retirement funds only get net inflows and have formed a growing base demand for stocks since 2015. Domestic households have supplemented this with systematic investment plans," the foreign broking firm said in a report on August 2.

The firm sees domestic bid on stocks sustaining for a long time like it did in the US from 1980 to 2000 until the Nasdaq bubble.

This is a big change for Indian equity markets compared to history, when the market relied largely on foreign inflows. "Such foreign bids were subject to vagaries of global conditions," Ridham Desai, Equity Strategist at Morgan Stanley India, pointed out in the report.

Also Read: Morgan Stanley upgrades India to overweight, downgrades China

In 2022, when foreign institutional investors sold around Rs 1.27 lakh crore worth of equities, domestic institutional investors poured Rs 2.67 lakh crore into the market, thus creating a floor.

This is one of the key reasons why the firm upgraded India to an 'overweight' rating on August 3 from an 'equal-weight' rating. The upgrade comes just four months after it elevated India from 'underweight' on March 31.

Apart from the steady domestic inflows, Desai is also bullish on India given the profit cycle is only halfway through. Profit share in GDP has risen from a low of 2 percent in 2020 to about 4 percent now and is likely to reach 8 percent in the next four to five years.

"This implies 10 percent nominal GDP, with about 20 percent compounding of headline earnings growth. Underscoring this forecast is the start of a new private capex cycle supplementing a government capex cycle that is already underway," he said.

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

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, enhancing India's attractiveness as an investment prospect.

Morgan Stanley also expects Sensex to reach 68,500 points by December, a potential increase of 6 percent from the current level.

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