In its latest report titled “India Equity Strategy Playbook”, Morgan Stanley highlights that Indian equities are currently undervalued, offering an attractive opportunity for long-term investors.
The report acknowledges that while short-term headwinds—particularly those originating outside India—may test investor patience, the long-term outlook remains promising. “It will require patience, given the potential for bad news from outside India,” the report notes, “but we believe rewards will come in time.”
Indian markets have shown notable resilience since September 2024, managing to absorb a series of challenges. These include a sharp correction in broader markets, concerns over overvaluation in small- and mid-cap stocks (SMIDs), trade-related uncertainty driven by US tariff changes, and ongoing geopolitical tensions. Despite these pressures, large-cap indices are still trading within 5 percent of their all-time highs.
Morgan Stanley outlines several key fundamental strengths underpinning its positive view on India. These include strong macroeconomic stability, improving terms of trade, a narrowing primary fiscal deficit, and low volatility in inflation.
Looking ahead, the report forecasts annual earnings growth in the mid-to-high teens over the next three to five years. This growth is expected to be driven by a fresh wave of private capital expenditure, stronger corporate balance sheets due to deleveraging, and a structural rise in discretionary consumer spending.
The report also touches on recent geopolitical developments that have reshaped the national security approach. A shift in counterterrorism strategy, combined with stronger military performance, has improved the country’s strategic posture, potentially reducing the risk of future attacks and boosting government decisiveness.
In terms of relative market performance, Morgan Stanley believes India is poised to outperform other emerging markets in the near term. “India’s real policy rate relative to the US is turning positive, which could support India’s relative outperformance against emerging markets in the coming months,” the report states.
Still, the outlook isn’t without risks. Domestically, key factors to watch include potential policy easing by the Reserve Bank of India (RBI), possible GST rate reductions, progress on a trade agreement with the United States, and incoming growth indicators. On the global front, shifts in US economic policy, Chinese deflationary trends, and geopolitical tensions will play a critical role in shaping market sentiment.
Given India’s relatively low beta, Morgan Stanley notes that while the country may outperform in a global downturn, it could lag during global bull markets.
In light of these dynamics, the report recommends investors tilt their portfolios toward Domestic Cyclicals, while reducing exposure to Defensive and External-facing sectors.
