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Investing.com -- Morgan Stanley said investors may be underestimating the strength of India’s growth cycle, saying that the country’s earnings and equity market peak lie ahead and that structural shifts will support higher valuations.
Population growth, policy-driven macro stability, better infrastructure, a rising entrepreneurial class and improving social outcomes are long-term drivers that could help India increase its share of global output in the coming decades.
That trajectory implies India will become one of the world’s most sought-after consumer markets, undergo a major energy transition, and see a rise in credit penetration and manufacturing’s share of GDP.
At the same time, fiscal consolidation, lower inflation volatility and structurally lower real rates would mean high growth with lower risk, enabling equity price-to-earnings multiples to expand.
Price action hides how much stocks have de-rated relative to long bonds, emerging markets and gold, even as India is gaining share in global GDP, according to analysts at Morgan Stanley. Adding that households’ growing shift into equities provides a sustained bid for stocks.
In the near term, the firm said the soft patch in earnings growth that began in the June quarter of fiscal 2025 is ending, though investors remain unconvinced.
Morgan Stanley cited a dovish central bank, likely tax reforms, a good monsoon, improving consumer sentiment, better relations with China and a pickup in capital expenditure as potential supports.
Additional catalysts could include a US trade deal, further rate cuts from the Reserve Bank of India, stronger high-frequency data, and weaker equity returns abroad.
Foreign portfolio investor positioning is at its weakest since 2000, the bank noted, but India’s “low beta” profile means it should outperform in a global bear market while lagging in a bull run.
Morgan Stanley’s portfolio strategy favors domestic cyclicals over defensives and external-facing sectors, with overweight calls on financials, consumer discretionary and industrials, and underweights in energy, materials, utilities and healthcare. It described the current market as one for stock-picking rather than broad macro-driven trades.