According to a report by international stockbroker Morgan Stanley, India’s equity market may be underestimating the possible turning point in the economic cycle because present prices do not accurately reflect the country’s strengthening macro fundamentals and impending profits recovery. The US-based company believes that strong domestic consumption, strong demographic trends, proactive governmental reforms, and growing infrastructure investment will support the profits and equity peak in the future rather than the past. Given India’s growing contribution to global output, stable monetary and fiscal policies, growing entrepreneurial class, improved social outcomes, and an improving capital expenditure cycle, Morgan Stanley believes there is a strong argument for a re-rating. The remarks are made against the backdrop of the Indian markets’ glaring underperformance in comparison to their emerging market (EM) counterparts.
All eight of 2025’s calendar months had positive returns for the MSCI EM Index, which has increased 17% year-to-date (YTD). In contrast, August saw a second consecutive month of declines in Indian equities markets, which are the third-largest weight in the EM measure. To date, they have only seen gains in four of the eight months. The benchmark Nifty 50 has gained less than 3% thus far this year, lagging far below the more general EM index. Due in part to slow earnings growth that is at odds with India’s high price-to-earnings (P/E) values, international investors have reduced their exposure to Indian stocks, which has resulted in this underperformance. Strict US trade restrictions on Indian goods have further increased economic uncertainty and undermined investor confidence.
Low beta, declining interest rates, and strong growth with less volatility translate into a higher P/E ratio. This manifests in the equity market as a persistent bid on stocks and further reinforces the trend of family balance sheets moving toward equity. The structural changes in family balance sheets toward stocks and increased macro stability are the main causes of the low beta. Morgan Stanley equities strategists Ridham Desai and Nayant Parekh wrote in a report on Monday that “price action hides how much stocks have de-rated relative to long bonds, EMs, and gold and how India is gaining share in global GDP.”
The brokerage prefers domestic cyclicals to defensives and industries that deal with the outside world. Energy, materials, utilities, and healthcare are underweighted, while financials, consumer discretionary spending, and industrials are overweighted. “Unlike a market driven by top-down or macro factors, this is likely to be a stock pickers’ market,” the analyst pair stated.
